MONEY 401k plans

The Secrets to Making a $1 Million Retirement Stash Last

door opening with Franklin $100 staring through the crack
Sarina Finkelstein (photo illustration)—Getty Images (2)

More and more Americans are on target to save seven figures. The next challenge is managing that money once you reach retirement.

More than three decades after the creation of the 401(k), this workplace plan has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012.

In the first part of this four-part series, we laid out what you need to do to build a $1 million 401(k) plan. In this second installment, you’ll learn how to manage that enviable nest egg once you hit retirement.

Dial Back On Stocks

A bear market at the start of retirement could put a permanent dent in your income. Retiring with a 55% stock/45% bond portfolio in 2000, at the start of a bear market, meant reducing your withdrawals by 25% just to maintain your odds of not running out of money, according to research by T. Rowe Price.

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That’s why financial adviser Rick Ferri, head of Portfolio Solutions, recommends shifting to a 30% stock and 70% bond portfolio at the outset of retirement. As the graphic below shows, that mix would have fallen far less during the 2007–09 bear market, while giving up just a little potential return. “The 30/70 allocation is the center of gravity between risk and return—it avoids big losses while still providing growth,” Ferri says.

Financial adviser Michael Kitces and American College professor of retirement income Wade Pfau go one step further. They suggest starting with a similar 30% stock/70% bond allocation and then gradually increasing your stock holdings. “This approach creates more sustainable income in retirement,” says Pfau.

That said, if you have a pension or other guaranteed source of income, or feel confident you can manage a market plunge, you may do fine with a larger stake in stocks.

Know When to Say Goodbye

You’re at the finish line with a seven-figure 401(k). Now you need to turn that lump sum into a lasting income, something that even dedicated do-it-yourselfers may want help with. When it comes to that kind of advice, your workplace plan may not be up to the task.

In fact, most retirees eventually roll over 401(k) money into an IRA—a 2013 report from the General Accountability Office found that 50% of savings from participants 60 and older remained in employer plans one year after leaving, but only 20% was there five years later.

Here’s how to do it:

Give your plan a shot. Even if your first instinct is to roll over your 401(k), you may find compelling reasons to leave your money where it is, such as low costs (no more than 0.5% of assets) and advice. “It can often make sense to stay with your 401(k) if it has good, low-fee options,” says Jim Ludwick, a financial adviser in Odenton, Md.

More than a third of 401(k)s have automatic withdrawal options, according to Aon Hewitt. The plan might transfer an amount you specify to your bank every month. A smaller percentage offer financial advice or other retirement income services. (For a managed account, you might pay 0.4% to 1% of your balance.) Especially if your finances aren’t complex, there’s no reason to rush for the exit.

Leave for something better. With an IRA, you have a wider array of investment choices, more options for getting advice, and perhaps lower fees. Plus, consolidating accounts in one place will make it easier to monitor your money.

But be cautious with your rollover, since many in the financial services industry are peddling costly investments, such as variable annuities or other insurance products, to new retirees. “Everyone and their uncle will want your IRA rollover,” says Brooklyn financial adviser Tom Fredrickson. You will most likely do best with a diversified portfolio at a low-fee brokerage or fund group. What’s more, new online services are making advice more affordable than ever.

Go Slow to Make It Last

A $1 million nest egg sounds like a lot of money—and it is. If you have stashed $1 million in your 401(k), you have amassed five times more than the average 60-year-old who has saved for 20 years.

But being a millionaire is no guarantee that you can live large in retirement. “These days the notion of a millionaire is actually kind of quaint,” says Fredrickson.

Why $1 million isn’t what it once was. Using a standard 4% withdrawal rate, your $1 million portfolio will give you an income of just $40,000 in your first year of retirement. (In following years you can adjust that for inflation.) Assuming you also receive $27,000 annually from Social Security (a typical amount for an upper-middle-class couple), you’ll end up with a total retirement income of $67,000.

In many areas of the country, you can live quite comfortably on that. But it may be a lot less than your pre-retirement salary. And as the graphic below shows, taking out more severely cuts your chances of seeing that $1 million last.

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What your real goal should be. To avoid a sharp decline in your standard of living, focus on hitting the right multiple of your pre-retirement income. A useful rule of thumb is to put away 12 times your salary by the time you stop working. Check your progress with an online tool, such as the retirement income calculator at T. Rowe Price.

Why high earners need to aim higher. Anyone earning more will need to save even more, since Social Security will make up less of your income, says Wharton finance professor Richard Marston. A couple earning $200,000 should put away 15.5 times salary. At that level, $3 million is the new $1 million.

MONEY 401(k)s

How to Build a $1 Million Retirement Plan

$100 bricks and mortar
Money (photo illustration)—Getty Images(2)

The number of savers with seven-figure workplace retirement plans has doubled over the past two years. Here's how you can become one of them.

The 401(k) was born in 1981 as an obscure IRS regulation that let workers set aside pretax money to supplement their pensions. More than three decades later, this workplace plan has become America’s No. 1 way to save. According to a 2013 Gallup survey, 65% of those earning $75,000 or more expect their 401(k)s, IRAs, and other savings to be a major source of income in retirement. Only 34% say the same for a pension.

Thirty-plus years is also roughly how long you’ll prep for retirement (assuming you don’t get serious until you’ve been on the job a few years). So we’re finally seeing how the first generation of savers with access to a 401(k) throughout their careers is making out. For an elite few, the answer is “very well.” The stock market’s recent winning streak has not only pushed the average 401(k) plan balance to a record high, but also boosted the ranks of a new breed of retirement investor: the 401(k) millionaire.

Seven-figure 401(k)s are still rare—less than 1% of today’s 52 million 401(k) savers have one, reports the Employee Benefit Research Institute (EBRI)—but growing fast. At Fidelity Investments, one of the largest 401(k) plan providers, the number of million-dollar-plus 401(k)s has more than doubled since 2012, topping 72,000 at the end of 2014. Schwab reports a similar trend. And those tallies don’t count the two-career couples whose combined 401(k)s are worth $1 million.

Workers with high salaries have a leg up, for sure. But not all members of the seven-figure club are in because they make big bucks. At Fidelity thousands earning less than $150,000 a year have passed the million-dollar mark. “You don’t have to make a million to save a million in your 401(k),” says Meghan Murphy, a director at Fidelity.

You do have to do all the little things right, from setting and sticking to a high savings rate to picking a suitable stock and bond allocation as you go along. To join this exclusive club, you need to study the masters: folks who have made it, as well as savers who are poised to do the same. What you’ll learn are these secrets for building a $1 million 401(k).

1) Play the Long Game

Fidelity’s crop of 401(k) millionaires have contributed an above-average 14% of their pay to a 401(k) over their careers, and they’ve been at it for a long time. Most are over 50, with the average age 60.

Those habits are crucial with a 401(k), and here’s why: Compounding—earning money on your reinvested earnings as well as on your original savings—is the “secret sauce” to make it to a million. “Compounding gives you a big boost toward the end that can carry you to the finish line,” says Catherine Golladay, head of Schwab’s 401(k) participant services. And with a 401(k), you pay no taxes on your investment income until you make withdrawals, putting even more money to work.

You can save $18,000 in a 401(k) in 2015; $24,000 if you’re 50 or older. While generous, those caps make playing catch-up tough to do in a plan alone. You need years of steady saving to build up the kind of balance that will get a big boost from compounding in the home stretch.

Here’s how to do it:

Make time your ally. Someone who earns $50,000 a year at age 30, gets 2% raises, and puts away 14% of pay on average will have $547,000 by age 55—a hefty sum that with continued contributions will double to $1.1 million by 65, assuming 6% annualized returns. Do the same starting at age 35, and you’ll reach $812,000 at 65.

Yet saving aggressively from the get-go is a tall order. You may need several years to get your savings rate up to the max. Stick with it. Increase your contribution rate with every raise. And picking up part-time or freelance work and earmarking the money for retirement can push you over the top.

Milk your employer. For Fidelity 401(k) millionaires, employer matches accounted for a third of total plan contributions. You should squirrel away as much of the boss’s cash as you can.

According to HR association WorldatWork, at a third of companies 50% of workers don’t contribute enough to the company 401(k) plans to get the full match. That’s a missed opportunity to collect free money. A full 80% of 401(k) plans offer a match, most commonly 50¢ for each $1 you contribute, up to 6% of your salary, but dollar-for-dollar matches are a close second.

Broaden your horizons. As the graphic below shows, power-saving in your forties or fifties may bump you up against your 401(k)’s annual limits. “If you get a late start, in order to hit the $1 million mark, you will need to contribute extra savings into a brokerage account,” says Dirk Quayle, president of NextCapital, which provides portfolio-management software to 401(k) plans.

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2) Act Like a Company Lifer

The Fidelity 401(k) millionaires have spent an average of 34 years with the same employer. That kind of staying power is nearly unheard-of these days. The average job tenure with the same employer is five years, according to the Bureau of Labor Statistics. Only half of workers over age 55 have logged 10 or more years with the same company. But even if you can’t spend your career at one place—and job switching is often the best way to boost your pay—you can mimic the ways steady employment builds up your retirement plan.

Here’s how to do it:

Consider your 401(k) untouchable. A fifth of 401(k) savers borrowed against their plan in 2013, according to EBRI. It’s tempting to tap your 401(k) for a big-ticket expense, such as buying a home. Trouble is, you may shortchange your future. According to a Fidelity survey, five years after taking a loan, 40% of 401(k) borrowers were saving less; 15% had stopped altogether. “There are no do-overs in retirement,” says Donna Nadler, a certified financial planner at Capital Management Group in New York.

Even worse is cashing out your 401(k) when you leave your job; that triggers income taxes as well as a 10% penalty if you’re under age 59½. A survey by benefits consultant Aon Hewitt found that 42% of workers who left their jobs in 2011 took their 401(k) in cash. Young workers were even more likely to do so. As you can see in the graphic below, siphoning off a chunk of your savings shaves off years of growth. “If you pocket the money, it means starting your retirement saving all over again,” says Nadler.

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Money

Resist the urge to borrow and roll your old plan into your new 401(k) or an IRA when you switch jobs. Or let inertia work in your favor. As long as your 401(k) is worth $5,000 or more, you can leave it behind at your old plan.

Fill in the gaps. Another problem with switching jobs is that you may have to wait to get into the 401(k). Waiting periods have shrunk: Today two-thirds of plans allow you to enroll in a 401(k) on day one, up from 57% five years ago, according to the Plan Sponsor Council of America. Still, the rest make you cool your heels for three months to a year. Meanwhile, 40% of plans require you to be on the job six months or more before you get matching contributions.

When you face a gap, keep saving, either in a taxable account or in a traditional or Roth IRA (if you qualify). Also, keep in mind that more than 60% of plans don’t allow you to keep the company match until you’ve been on the job for a specific number of years, typically three to five. If you’re close to vesting, sticking around can add thousands to your retirement savings.

Put a price on your benefits. A generous 401(k) match and friendly vesting can be a lucrative part of your compensation. The match added about $4,600 a year to Fidelity’s 401(k) millionaire accounts. All else being equal, seek out a generous retirement plan when you’re looking for a new job. In the absence of one, negotiate higher pay to make up for the missing match. If you face a long waiting period, ask for a signing bonus.

3) Keep Faith in Stocks

Research into millionaires by the Spectrem Group finds a greater willingness to take reasonable risks in stocks. True to form, Fidelity’s supersavers have 75% of their assets in stocks on average, vs. 66% for the typical 401(k) saver. That hefty equity stake has helped 401(k) millionaires hit seven figures, especially during the bull market that began in 2009.

What’s right for you will depend in part on your risk tolerance and what else you own outside your 401(k) plan. What’s more, you may not get the recent bull market turbo-boost that today’s 401(k) millionaires enjoyed. With rising interest rates expected to weigh on financial markets, analysts are projecting single-digit stock gains over the next decade. Still, those returns should beat what you’ll get from bonds and cash. And that commitment to stocks is crucial for making it to the million-dollar mark.

MONEY retirement planning

The Growing Divide Between the Retirement Elite and Everyone Else

empty and full transparent piggy banks
iStock

Americans are on track to replace 60% of income, but only one in five pre-retirees report good health. That's likely to prove costly.

There’s a growing retirement savings gap between workers with 401(k)s and those without.

Overall the typical American worker is on track to replace about 58% of current pay through savings at retirement. That’s according to a new Lifetime Income Score study, by Empower Retirement, which calculated the income workers are on track to receive from retirement plans and other financial assets, as well as Social Security benefits.

“Those who have workplace plans like 401(k)s aren’t doing too badly, but there’s a big savings deficit for those who don’t have them,” says Empower president Ed Murphy. (Formed through a recent merger, Empower combines the retirement services of Putnam, Great-West and J.P. Morgan.)

Those with access to a 401(k) or other retirement plan had lifetime income scores of 74%, while those lacked plans had an average score of just 42%. It’s one reason this year’s overall score of 58% is a slight dip from last year’s score of 61% .

Living well on just 58% of current income is certainly possible—many retirees are doing just fine at that level. But financial planners typical suggest aiming for a 75% to 80% replacement rate to leave room for unexpected costs. And for many workers, it’s possible to close the savings gap by stepping up 401(k) contributions by staying on the job longer.

But truth is, most workers end up retiring well before age 65, and few have enough saved by that point. The least prepared workers, some 32% of those surveyed, were on track to receive just 38% of their income in retirement, which would be largely Social Security benefits.

By contrast, an elite group of workers, some 20%, are on track to replace 143% of their current income, Empower found. And it’s not just those pulling down high salaries. “The key success factors were access to a 401(k) and consistently saving 10% of pay, not income,” Murphy says.

Access to a financial adviser also made a big difference in whether workers were on track to a comfortable retirement income. Those who worked with a pro were on track to replace 82% of income vs 55% for those without. And for those with a formal retirement plan, their lifetime income score hit 87% vs the average 58%.

For all retirement savers, however, health care costs are a looming problem. Only 21% of those ages 60 to 65 reported having none of six major medical issues, such as diabetes or tobacco use. For the typical 65-year-old couple, health care expenses, including Medicare premiums and out-of-pocket costs, might reach $220,000 over the course of retirement, according to a Fidelity analysis. Those in worse health can expect to pay far higher costs, which means you should plan to save even more.

Here are other key findings from the Empower study:

  • Nearly two-thirds of workers lack confidence about their ability to cover health care costs in retirement
  • Some 75% say they have little or no concern about job security, vs. 60% in 2012.
  • Some 72% of workers are somewhat interested or very interested in guaranteed income options, such as annuities.
  • The percentage of workers considering delaying retirement is falling—some 30% now vs. 41% from a peak in 2012.
  • Many are hoarding cash, which accounts for 35% of retirement plan assets. For those without advisers, that allocation is a steep 55%.

Clearly, estimating your retirement income is crucial to achieving your financial goals—and studies have shown that going through that exercise can help spur saving. More 401(k) plans are offering tools and other guidance to help savers estimate their retirement income and help you choose the right stock and bond allocation. For those who aren’t participating in a 401(k) plan, try the T. Rowe Price retirement income calculator, which is free.

MONEY retirement planning

Why Your Empty Nest May Be Hazardous to Your Retirement

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Alamy—© Mode Images / Alamy

You may want to live a little when your kids leave home. But what you do with that money can make or break your retirement, a new study finds.

How well prepared you are for retirement may come down to one simple question: what do you do with money that once would have been spent on your kids?

In recent years, two common models of retirement preparedness in America have begun to draw vastly different pictures. The optimal savings model, which looks at accumulated savings, concludes that only 8% of pre-retirees have insufficient resources to retire comfortably. The income replacement model, which looks at the level of income that savings will generate, concludes half the working age population is in deep trouble.

These two models incorporate many different assumptions, which is why they can reach contradictory conclusions. For one thing, the optimal savings model assumes savings are held in something like a 401(k) plan and drawn down over time. The income replacement model assumes savings are converted to lifetime income through an annuity at retirement.

Accounting for these and many other differences, researchers at the Center for Retirement Research at Boston College have concluded that the key variable in retirement readiness is empty nest spending patterns. “If households consume less once their kids leave home, they have a more modest target to replace and they save more between the emptying of the nest and retirement,” the authors write. This creates a financial comfort level that those who spend the same amount—most likely on themselves—have greater difficulty achieving.

When the more conservative empty nest spending assumptions of the optimal savings model are applied to the income replacement model, the level of retirement preparedness is similarly optimistic. What the paper cannot answer, however, is which model accurately reflects the way empty nesters behave.

“Do parents cut back on consumption when kids leave, or do they spend the slack in their budgets?” the authors write. “No one really knows the answers.” How households react when kids leave the fold is not well understood, they say.

Yet that’s a problem for academics. You can control the way you act. The upshot is that if you resist the temptation to spend instead of save the money your kids were costing you, retirement readiness may be at your fingertips.

Read next: 5 Ways to Know If You’re on Track to Retire Early

MONEY Savings

Drink That Latte! Here Are 3 Ways to Save and Still Enjoy Life

hands holding latte
Mikael Nyberg—Getty Images/Flickr

It's okay to enjoy to life's little pleasures, as long you have a realistic retirement savings plan.

You’ve heard of the Latte Factor approach to saving: Eliminate small nonessential outlays—like the $5 you spend daily on lattes or other treats—and you can end up with an extra $150,000 or so over the course of 30 years. Well, I have a better idea: Enjoy life’s little pleasures—your latte, Dunkin’ or other indulgences—and focus instead on more realistic ways to build a retirement nest egg.

I’m all for being careful about spending. But the idea that you’re going to end up with a big fat sum by foregoing small treats—in my case, Boston Creme donuts—and investing the money you would have spent on them strikes me as, shall we say, impractical.

For one thing, to get that $150,000, you would have to invest $35 a week and earn a 6% return every year for 30 years. But come on, who has the discipline to sacrifice life’s little pleasures day in and day out for decades—and then follow through by setting aside that $5 every day and investing $35 at the end of each week? Even if you were able to pull it off, do you really want to live like you’re on a perpetual diet?

Fortunately, you don’t have to live like an ascetic to build a retirement nest egg. Besides, it turns out savoring rather than denying yourself little treats is the better way to go anyway. In a paper titled “If Money Doesn’t Make You Happy, You Probably Aren’t Spending It Right,” researchers conclude that many small delights make us happier than a few large ones, noting that “it may be better to indulge in a variety of frequent, small pleasures—double lattes, uptown pedicures, and high thread-count socks rather than pouring money into large purchases, such as sports cars, dream vacations, and front-row concert tickets.”

So how can you drink your lattes—or double lattes—and have your retirement nest egg too? Here are three tips:

1. Focus on big-ticket items. Asked why he robbed banks, career criminal Willie Sutton supposedly answered “because that’s where the money is.” In fact, a reporter made up the quote, but no matter. You should apply that reasoning to saving—that is, target your efforts where you’ll get the biggest payoff.

A quick look at the Department of Labor’s Consumer Expenditure Survey shows the single biggest items in the typical American’s budget is housing. So if instead of buying a $250,000 house, you go with a more modest $200,000 number, you might lower your mortgage, property taxes and insurance costs by roughly $250 a month. Assuming a 6% annual return from a low-cost diversified portfolio over 30 years, you’re talking an extra $245,000.

Other areas that can prove fertile hunting grounds for big savings, include cars, vacations, electronics, college expenses and, of course, investment fees. The actual savings you reap will depend on the particulars of your situation. In the housing example above, I assumed a 20% down payment, 4.2% 30-year fixed mortgage, property taxes and insurance equal to 1.5% of the sales price and ignored income taxes to keep things simple. But the precise number isn’t important. The idea is what matters—namely, that by cutting back on a big expense, especially one you incur regularly like a house or car payment, you can boost the eventual size of your retirement nest egg.

2. Make it automatic. Merely cutting expenses doesn’t guarantee more savings. You also need to make sure that the money you free up by buying a less expensive home or car isn’t simply diverted to new spending. The best way to do that: Lock in your savings by enrolling in your 401(k) or other company payroll deduction plan and contributing at least enough to get the full employer match. If you don’t have a 401(k) or you can also afford to save money outside your employer’s plan, sign up for an automatic investing plan that transfers money from your checking account to a mutual fund every month.

By arranging to have money go from your paycheck or your checking account every month without you having to make a conscious decision to move money to your savings or investment accounts via a phone app, an online transfer or even by writing out a check, it’s more likely that the dough no longer going to expenses will be saved rather than spent on other things.

3. Overcome your fear of commitment. One reason it’s more difficult to save than spend is that spending provides immediate gratification, while saving pays off in the distant future. But there are a number of ways to effectively trick yourself into saving.

One such technique known is a “commitment device,” which is a fancy term for getting yourself to do something you know you should but lack the discipline to pull off on your own. Go to Stickk.com, for example, and you can choose, or commit to, a savings goal of your choice—say, accumulating $500 a month, or $6,000 over the course of a year. If you fail to hit that target, you agree that you’ll pay a penalty—perhaps $100—to a person or organization you’re not especially fond of. If you’re a Republican, for example, that might mean making a contribution to a Democratic candidate. That provides the incentive for you to meet your goal. Or, you can use a carrot instead of a stick. For example, you might reward yourself with a new tablet or smartphone, if you manage to save a certain amount over the course of a year.

Ultimately, you have to find a way to save that makes the most sense for you. But you’ll increase your odds of success, by devising a strategy you’ll actually be able to stick to and thus more likely to lead to a larger nest egg down the road.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY IRAs

There’s Free Money for IRA Rollovers—Here’s How to Invest It

Should you take the money and run? Only if you choose the right low-cost funds.

Back in the day, you could walk into a bank to open a new account and walk out with a free toaster.

Today, you can get anywhere from $50 to $2,500 for rolling over a 401(k) into an Individual Retirement Account, or just by moving an IRA from another financial institution.

But since banks are not in the habit of giving away money, you need to ask: What is the catch?

IRA providers use cash incentives, which are cheaper than advertising or direct mail, to acquire new customers. The latest marketing twist comes from Fidelity Investments, which is offering an “IRA Match” program to new and existing customers who transfer a Roth, traditional or rollover IRA to the company. Rollovers from 401(k)s are not eligible.

Fidelity will match your contributions up to 10% for the first three years that the account is open, although you would have to roll over a whopping $500,000 or more to get that level of match.

For most people, the match will be much smaller. A rollover of $50,000, for example, would qualify for a 1.5% match in each of the next three years. That is worth $260 over three years if you max out your annual contributions at $5,500, or $290 if you are over age 50 and eligible to make additional $1,000 catch-up contributions.

Fidelity is pitching this as the way to encourage higher levels of retirement savings, the way many employers make matching contributions to workers’ 401(k) plans.

“When you look at what really works in the retirement space, you can see that the employer match is a major factor driving participation,” says Lauren Brouhard, Fidelity Investments’ senior vice president for retirement. “We wanted to take an element of what works in the workplace and bring it to the IRA.”

Similar deals abound. For example, Charles Schwab Corp frequently runs promotions offering up to $2,500 for opening a new account, including rollovers from 401(k)s. Ally Bank will pay a $100 bonus for rolling between $25,000 and $50,000, and more for larger rollovers. Just do a Web search for “IRA cash bonus” to see how pervasive the practice has become.

Should you take the money and run? Perhaps, but do not let the cash distract you from more fundamental considerations.

For starters, do not roll funds out of a workplace 401(k) plan into an IRA if it charges higher fees. You should also make sure that the new provider offers the type of retirement investments you are looking for.

If you are rolling over to a mutual fund or brokerage company, the cardinal rule is to make sure your new provider does not earn back the bonus by parking you in high-cost active mutual funds or managed portfolio services.

“It’s a free lunch, but not if you yield to the temptations,” says Mitch Tuchman, managing director of Rebalance IRA, a wealth management firm that offers low-cost IRA portfolio management. “You have to avoid falling prey to the sirens of active management.”

Instead, manage your portfolio yourself by creating a portfolio of inexpensive passive index funds or exchange traded funds, which are available through their providers’ brokerage services.

To illustrate, he suggested a portfolio of four Vanguard ETFs whose fees are each below 20 basis points: Total U.S. Stock Market, Total International stocks, Total Bond Market and Total International Bond.

You can view Tuchman’s sample portfolios here.

Read next: 5 Signs You Will Become a Millionaire

MONEY Savings

5 Signs You Will Become a Millionaire

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Martin Barraud—Getty Images

A million isn't what it used to be. But it's not bad, and here's how you get there.

A million bucks isn’t what it used to be. When your father, or maybe you, set that savings goal in 1980 it was like shooting for $3 million today. Still, millionaire status is nothing to sniff at—and new research suggests that a broad swath of millennials and Gen-Xers are on the right track.

The “emerging affluent” class, as defined in the latest Fidelity Millionaire Outlook study, has many of the same habits and traits as today’s millionaires and multimillionaires. You are in this class if you are 21 to 49 years of age with at least $100,000 of annual household income and $50,000 to $250,000 in investable assets. Fidelity found this group has five key points in common with today’s millionaires:

  • Lucrative career: The emerging affluent are largely pursuing careers in information technology, finance and accounting—much like many of today’s millionaires did years ago. They may be at a low level now, but they have time to climb the corporate ladder.
  • High income: The median household income of this emerging class is $125,000, more than double the median U.S. household income. That suggests they have more room to save now and are on track to earn and save even more.
  • Self-starters: Eight in 10 among the emerging affluent have built assets on their own, or added to those they inherited, which is also true of millionaires and multimillionaires.
  • Long-term focus: Three in four among the emerging affluent have a long-term approach to investments. Like the more established wealthy, this group stays with its investment regimen through all markets rather than try to time the market for short-term gains.
  • Appropriate aggressiveness: Similar to multimillionaires, the emerging affluent display a willingness to invest in riskier, high-growth assets for superior long-term returns.

Becoming a millionaire shouldn’t be difficult for millennials. All it takes is discipline and an early start. If you begin with $10,000 at age 25 and save $5,500 a year in an IRA that grows 6% a year, you will have $1 million at age 65. If you save in a 401(k) plan that matches half your contributions, you’ll amass nearly $1.5 million. That’s with no inheritance or other savings. Such sums may sound big to a young adult making little money. But if they save just $3,000 a year for seven years and then boost it to $7,500 a year, they will reach $1 million by age 65.

An emerging affluent who already has up to $250,000 and a big income can do this without breaking a sweat. They should be shooting far higher—to at least $3 million by 2050, just to keep pace with what $1 million buys today (assuming 3% annual inflation). But they will need $6 million in 2050 to have the purchasing power of $1 million back in 1980, when your father could rightly claim that a million dollars would make him rich.

Read next: What’s Your Best Path to $1 Million?

MONEY First-Time Dad

How to Avoid Spoiling Your Child

Luke Tepper
One-year-old Luke, having his cake and eating it too

First-time dad Taylor Tepper learns how not to be the kind of parent he fears becoming.

Our son, Luke, recently celebrated his first birthday. Family and friends generously gave the tyke rubber soccer balls, race cars, pegs, hammers, marbles, and chic winter gear. Luke now has more toggle coats than I do.

Luke’s things, like a rebel army, have begun to outnumber my own. He now has nearly a dozen bins filled with plastic and wooden products crafted by large companies and bought by suckers like me. His clothes occupy a spacious three-drawer dresser, while mine are packed tightly in a small closet. He has twice as many pairs of socks as I do. This all feels silly. Give Luke the option to play with an empty milk carton or a fluffy stuffed animal, and he’ll be shaking the carton between his hands like a boy possessed before you can blink. The box carries more value than the toy inside.

As I cleaned up after Luke’s party, I started thinking about the nature of toddlers and their stuff, and I’ve been mulling over a few issues ever since. The first has to do with spoiling. I know that you can’t really spoil a baby—infants’ needs must be met. But am I developing habits of indulgence now that will ossify over time and lead me to spoil Luke when he’s older? Am I setting myself up to be a bad parent? The second issue has to do with the presents themselves, the catalyst of my spoiling concern: there must be a better use for all that money.

The truth about spoiling

On the first question, the experts are clear. “You’re not going to spoil a baby,” says Tovah P. Klein, assistant professor of psychology at Barnard College and author of How Toddlers Thrive. “They need to be comforted and cared for.”

That Mrs. Tepper and I do. We also warm Luke’s baby wipes, pull him around in a red wagon for hours on end, and turn on “Sesame Street” whenever he’s systematically broken us down. My fear is that our good-natured, responsive parenting will morph into something more unseemly as he ages. It’s not a big leap to image a world where I’m cooking a second dinner because 2-year-old Luke is dissatisfied with the first. I shudder when scenes like that unfold in my mind’s eye.

The key thing for me to recognize, says Klein, is that I don’t need to protect my son from unhappiness.

“If you think, my role is to make him happy all the time, or to entertain him, the child doesn’t learn how to handle hard times, like when he’s angry or frustrated or sad,” Klein says. “Your goal as parents is, how do you help him deal with anger when limits are imposed.”

That’s an intuitive point, but one slightly difficult to reconcile with experience. Luke is our first child, so everything is new to us. Call it the Unbearable Lightness of Parenting. So in the next five to 12 months, as he develops a sense of self and forms his own ideas of what he wants, it will be challenging to hold a firm line. How do I know this tantrum isn’t just a test of limits but a true expression of real pain? Will I have the stomach to stay the course?

“He’ll be happy if you love him and let him know you’re there,” Klein told me. “Put up some reasonable limits and help him through those frustrating moments. That is what counters spoiling.”

Children, especially really young ones, crave structure. It’s the lack of it that results in insecurity. So if he doesn’t want to eat what I’ve cooked for dinner, fine. But I’m not frying up another meal.

Getting presents—and other stuff—under control

Limits are certainly in order for all of his toys. Between Christmas and his birthday and well-meaning friends doting on the little guy, we have enough Elmos and plastic cell phones and wooden school buses to open up our own boutique. This overflow of generosity leads to a short-term concern as well as a longer-term one.

In the here and now, the problem is sheer volume. “Children need less material goods,” says Klein. “More stuff tends to overstimulate them.” We already try to highlight only a few options for him to play with, but we’ll resolve to be even more selective going forward. We’ll offer him one bin to tear apart rather than two.

Later on, though, I worry about relying on toys (and ice cream and other objects that cost money) as a means of reinforcement. I don’t want to get into the habit of giving him things all the time so that he’ll do X or Y. Plus, I don’t think I’ll be able to afford it.

“Not every reward has to be a material reward,” says psychologist and parenting expert Lawrence Balter. “Sometimes rewards can be privileges as they get older.”

I was discussing the issue of presents at Luke’s party with a friend from college, and she asked me if we had starting saving for his college fund. (We started a 529, but it’s tragically underfunded.) Instead of toys, she asked, why don’t you ask people to donate to the fund instead?

Which is what we’re going to do from now on. Rather than stuff our bins full of perfectly fine but ultimately useless things, we’ll ask friends and family to chip in to help pay for his insanely expensive education. While that might make the act of gift-giving a little less fun for them, it will help us afford an essential good that will dramatically improve his life.

Plus, it’s one less spaceship for me to trip on in the middle of the night.

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