Retiring with $1 million to your name would give you around 4x the net worth that the median American household has in retirement. While having a million-dollar portfolio is a retirement dream for many people, making that dream come true requires some serious effort.
Almost anyone can become a millionaire if they make a commitment to save early in their career and stick with it over several decades. Here’s 5 steps on how to save $1 million in time for retirement.
1. Set a Goal – As Early as Possible
Nobody plans to fail, but plenty of people fail to plan. To retire as a millionaire, the first thing you need is a proper retirement plan for the long haul. This includes making – and sticking to – a retirement plan as early in your career as possible.
For example: If you start saving for retirement at age 25 and save $4,830 per year, or about $400 per month, and earn 7% annual investment returns, you will accumulate just over $1 million by age 65. If you wait until age 35 to start saving, you’ll need to save over $10,000 per year to hit $1 million by 65, assuming the same investment returns.
If your employer offers to match your contributions up to a certain percentage, be sure to contribute enough to get the full match. It’s like getting a guaranteed return on your investment. Finding the cash to stash may be a challenge, particularly when you’re young, but don’t let that stop you from pursuing future riches.
2. Save on Taxes
To grow your money faster, you can also use tax breaks. For example: If you put $5,000 in a 401(k) and you are in the 25% tax bracket, you’ll save $1,250 on your tax bill. Income tax won’t be due on your contribution until you withdraw it from the account.
When you put the money in the 401(k), it reduces the amount of income you have, so it’s less tax you are paying at the end of the year. The savings that you get from being able to defer that income isn’t to be ignored.
It is however important to note that you will need to accumulate more than $1 million in a retirement account to have $1 million dollars to spend in retirement. This is because you still need to pay income tax on each distribution.
3. Prepare for the Unexpected
A full emergency fund won’t do much toward helping you build your million dollar nest egg, but it can help you keep the rest of your progress if something happens along the way. Part of long-term planning involves accepting the idea that setbacks will inevitably occur. If you are not prepared, these setbacks can put a stop to your savings efforts: Nearly 70% of Americans have less than $1,000 in cash available to them in savings. That kind of situation can put you one slip-and-fall accident, fender bender, or even moderate illness away from slipping back into debt.
While you can’t avoid all of the bumps in the road, you can prepare in advance to mitigate the damage they can do by always maintaining an emergency fund. This emergency fund will also help keep you from building up credit card debt (see next step) or prematurely tapping your retirement funds, two ways people pay for emergencies that can undercut their financial security.
4. Keep Debt at Bay
Nobody likes the idea of carrying significant debt in retirement. The closer you get to retirement, the heavier a burden debt can become. Every dollar you pay to a lender is one you could spend on living expenses, vacations or a legacy for your children. You don’t need to retire debt-free, but downsizing what you owe before you stop working is a good idea. There are steps you can take to try and pay off your debt:
- Take all your debts and line them up from highest interest rate to lowest interest rate. On all your debts except the one with the highest interest rate, pay the minimum.
- On your highest interest rate debt, accelerate the payment above and beyond the minimum by throwing everything you can against it.
- Once that debt is paid off, repeat the accelerated payoff on the next highest interest rate debt you have, adding the money you had been paying toward the now retired debt to what you’re paying down on it.
- Repeat the process until your debts are paid off.
If possible, work toward the goals of debt reduction and savings in tandem— capturing tax benefits while taking advantage of available savings opportunities.
5. Monitor Your Portfolio
When it comes to your retirement portfolio, remember that your overarching goal is to create a mix of investments that work together to preserve capital, generate income and grow.
There’s no need to obsess over every movement of the Dow Jones Industrial Average. Instead, check your portfolio once a year and re-balance your asset allocation to keep on track with your plan.
However, managing your own portfolio comes with risks. Taxes, estate planning, rules around gifting to relatives, timing of withdrawals from retirement accounts and other issues can be immensely complex and are getting more so. This is where a retirement income advisor can help.
Experienced retirement planning professionals get to know your individual situation and consider your goals to create a plan designed specifically to help you reach the future you want. If your situation requires a pro’s help, make sure you get someone who is reliable and trustworthy.
Fortunately, with enough time, a decent income, and a solid plan, you can get to your $1 Million goal entering retirement.
Some people even question whether a million is enough. Test that theory by figuring out whether your retirement income goal still makes sense. And if in doubt, reach out to an experienced retirement planning firm for help.