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Financial Insights

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How Hard (or Easy) Is It To Accumulate $3 Million?

11 April, 2014

Under recently proposed guidelines for prohibiting further contributions, the threshold for retirement account balances would be approximately $3 million. Using current assumptions, the White House estimated this limit would impact only 1% of U.S. retirement account holders. However, an analysis by the Employee Benefits Research Institute released April 15, 2013, challenged that assumption, stating up to 5% of workers under age 35 could eventually find their contributions capped before retirement. “I think a lot of people, when they first hear $3 million, assume it’s not going to affect many individuals,” said Jack VanDerhei, research director at EBRI in an NBCnews.com article by Martha White.

This disagreement about the potential impact prompts the question: How hard is it to accumulate $3 million in a qualified retirement account? The answer depends on the assumptions one uses for the calculation. The projected annual contribution, length of the saving period, and rate of return all play a significant role. For example:

An individual who saves $5,000 a year for 50 years and at an annual rate of return of 5% would accumulate just over $1 million, far short of the $3 million threshold. If the same individual was able to save the current maximum annual amount of $17,500, the accumulation would exceed the limit in the 45th year. Which projection is more realistic? That’s hard to say. The following matrix shows the different ways $3 million can be accumulated using these three variables.


The projections highlight a couple of interesting points: Accumulating a large balance is greatly influenced by time and the average annual rate of return. An increase in rate of return from 5% to 8% takes a decade off and lowers the annual deposit by 22 percent. However, when the time period is shortened, it requires a substantially larger annual deposit to achieve the target accumulation – even at a higher rate of return. At 25 years, there just isn’t enough time for compounding to work its accumulation magic.