Good activity idea from a Fortune article that picks apart the research from Fidelity about the traits of 401(k) millionaires. The reporter has an axe to grind which is apparent:

This, of course, runs counter to some of the articles that some (including me) have written about 401(k)s. I once called 401(k)s a “lousy idea, a financial flop, a rotten repository for our retirement reserves.” But if 401(k)s are now minting millionaires, maybe I was wrong. And hey, I have a 401(k) that has far less than $1 million in it. I want it to have more, and more than $1 million would be great. So I decided to take a look at Fidelity’s five tips to see if I, too, could become a 401(k) millionaire.

Sadly, I cannot, or at least I am not likely to. And neither, I’m sorry to say, are you.

Many teachers lament about the challenges of getting 17 year-olds to think about retirement.  There seems to be some mystique about the concept of being a millionaire so maybe this activity using a 401(k) calculator will get students excited.

Here’s a set of assumptions you can have them use as a base case:

This will give you an opportunity to describe the inputs that determine the value of a 401(k) plan:

• Starting salary of $45,000 is about average for a recent college graduate (and varies quite a bit based on college major)
• Assumes 10% savings rate with a company match of 3% (30% of your contribution)
• Assumes salary increases at rate of inflation (about 3%)
• Assumes annual rate of return of 8% over this 40 year period.  This assumption assumes a portfolio largely consisting of stocks and is based on historical returns, which as we know is no guarantee of future performance.

Bonus question for students: The results of this calculator are in future dollars.  How much would you need to have in 40 years that would equate to $1,000,000 in today’s dollars.

Answer:  This is a critical concept for students to understand.  Due to inflation (the rising cost of goods), a dollar in 40 years will be worth much less than a $1 today.  Using this inflation calculator, one can get a sense of how much in future dollars would be needed to equate to $1,000,000 in today’s dollars (assuming a given rate of inflation):

The answer:  About $3.3 million.  May want to have the students create additional scenarios using the 401(k) calculator to figure out what will be required to get to that $3.3 million figure (higher savings rate or investment return would be the logical place to start).

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Check out our activity on The Mystery of the $8 Million Janitor.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.