I had a discussion recently about the profiles of the folks who go on to become secret dividend millionaires. Regular readers know this all from memory by now, but typically these people remain unmarried, childless, display ultra-frugality and extreme longevity. In short, the kind of lifestyle that not many people actually have in the real world.

I realize I missed out an important caveat when writing about them. The reason they appear on this site is because their stories hit local (sometimes national) media first. And the reason their stories feature in the media is because, a lot of the time, their estates are left to charity. Obviously their estates go to charity because most of them have no direct descendants. Hopefully you can see the loop that’s developing here! Anyway, I was wrong to give the impression that the above characteristics are somehow necessary features to becoming a ‘dividend millionaire’.

The reason I’m writing this is because I noticed that Fidelity recently released data about their account holders. It does this quarterly and it provides a useful snapshot as to the state of folks’ 401(k)s and IRAs. Anyway, the figures will either fill you with optimism or despair depending on your outlook. The good news is that a record number of accounts sport $1m-plus balances. To be a bit more precise, over 440,000 IRAs or 401(k)s had balances of over $1m at Fidelity. The bad news is this figure represents less than 2% of the 27 million accounts managed by the company. Not only that, but the median 401(k) account value for baby boomers was around $70,000. For those just starting out, the last point in particular might make you lose heart. Don’t let it.

Meet Joe Public

Turn the clock back thirty years to early 1990. Joe Public is thirty-years old and has been working for twelve years since finishing high school. He managed to save an average of $150 per month during this time, so $21,600 in total by the time the 1990s began.

At this point, Joe decides to get serious about saving. Now, he isn’t a stock picker. In fact, he doesn’t know much about balance sheets and income statements at all. However, Joe does share something in common with a man who many people consider the world’s most famous stock picker, Warren Buffett. Joe is an optimist when it comes to the future of America. Given enough time, he thinks the direction of travel is decidedly one-way: forward. On that basis he decides to invest in the ultimate barometer of corporate America – the S&P 500.

Joe puts his $21,600 work. He doesn’t need the cash, so all dividends roll up in the fund and are reinvested. He also decides to commit a portion of his future earnings to the same investment. At this point, Joe is able to comfortably save $200 a month. His strategy is to let the monthly savings accumulate in a cash account, and then to invest the lump sum at the start of the next trading year. For instance, on the first trading day of 1991 he would invest a total of $2,400 into his S&P 500 total return fund.

As each year passes, Joe decides to bump up the contribution by 5% to offset inflation and reflect the fact he will probably be earning more as time goes by. He also convinced his wife, Jane, to invest in the same way alongside him. Jane doesn’t have the same $21,600 to start with, but she commits herself to following the exact same future savings pattern as Joe.

Results

As the years pass by, Joe and Jane follow their plan exactly as they said they would. Joe’s intuition proved right — some years were good, and some were not so good, but the overall direction of corporate America was forward.

Yesterday, they decided to check up on their account balance. They are both sixty years old now, so retirement is something they’ve been thinking about more and more recently. When they open their account balance they see a combined total of just over $1.5m.

Joe and Jane note some interesting facts as they think about how well they’ve done. First, they note that the most they ever set aside in one month was $785 each. That was in 2019. Secondly, they now match the profile of a Fidelity 401k millionaire to a tee – 60 years old, with around $1.4m in the pot (okay, there are two of them so it’s not exactly accurate, but still).

Overview

My view is that a lot more people can end up like Joe and Jane than they realize when they first start out. Ok, so Joe and Jane never paid fees or taxes — not entirely realistic. However, these days you can own the exact same asset that they did while paying less than 2 basis points per annum for the privilege. It’s not zero, but it’s as close as you can get.

Secondly, tax-deferred and tax-exempt vehicles are a thing. You can use them, as could Joe and Jane. Also, and in the case of the 401(k), an employer match. It is a common characteristic of 401(k) millionaire accounts that they are maxing out contributions. Finally, you have just as long, if not longer, than Joe and Jane. I will finish the piece with a quote from that last linked article: “You don’t need to make a million to save a million”.

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