For many of us, making our first $1 million is the ultimate financial goal. While this has become much more attainable in recent times, many people still never hit this mark. What a lot of people fail to realize is that saving $1 million by retirement is not out of reach. In fact, with careful, calculated planning, one can be practically sure to retire with the much coveted millionaire status.
There are a few essential guidelines for achieving this goal. Ultimately, when it comes to saving, starting early is key. Very few have ever made $1 million overnight. On the contrary, it requires consistency, perseverance, and – most importantly – time. While it would be optimal to start saving in your 20s, the best time to start is now – no matter your age.
In your 20s
During your 20s, retirement can seem distant and unreal. But the years go by quickly; anyone nearing retirement can attest to the old saying “time flies”. In addition, reaching the intended amount of savings becomes increasingly difficult the later it is started due to accrued expenses such as mortgage and childcare payments.
The primary reason to start early with retirement planning is compound interest. Simply put, compound interest is the process by which a sum of money grows due to interest building upon itself over time. Logically, the more time you have, the more you can benefit from compounding, which is why investors in their 20s should take heed.
Here are some of the basics of compounding interest: If you invest $1,000 in a safe long-term bond that will earn 3% interest per year, after the end of the first year, the investment will grow by $30 (3% of $1000). This gives a total of $1,030. The following year there will be a 3% gain on $1,030, this means that the investment will grow by $30.90. Using this same model and projection, by age 40 the investment would reach $3,262.04.
At this stage, to dramatically increase earnings the proper thing to do would be to invest in a higher earning instrument, such as a stock market fund.
Let’s say you start investing in the market at $100 a month, and you average a return of 1% a month (or 12% a year, compounded monthly) over 40 years.
Your retirement account will be a little over $1.17 million after a 40 year period. If the investor was lucky enough to start at age 20, he could retire at 60 years old with upwards of a million in retirement funds.
In your 30s
As mentioned above, the sooner you begin investing, the better. But what if you missed the opportunity to begin investing in your 20s? Your 30s is your next best bet. After consulting with your financial advisor, make a small initial investment in the stock market to gain an understanding of the market and learn what equity investing is all about. Pick a company that has a product or service that is familiar to you or that you personally like. Pick companies that are well known and relatively stable. Play it safe.
Let us assume that you are 30, earning $50,000 a year and want to retire at 65 with $1 million in savings. Once again, we will assume that you are beginning with zero in savings.
In this case the easiest way to accomplish this would be to save around $2,317.00 a year. On a monthly basis that equates to $193. This amount should then be invested in a financial instrument that earns 12% annually.
In another scenario let’s imagine that at age 30, you have $50,000 a year in earnings and zero savings, and you want to live on 85 percent of your pre-retirement, pre-tax income when you retire (which is $42,500 per year).
To achieve this goal, you’ll need to amass $2 million ($2.06 million, to be exact) by the time you retire. In order to achieve this you would need to save $600 per month.
The correct way to invest the aforementioned amount would be to spread the investments out. One option would be to put 70 percent into stocks, 25 percent into bonds and keep five percent in cash. The prognosis of $2 million is based on the assumption that the markets are performing on average.
In your 40s and beyond
They say life begins at 40; so can investing. A 40-year-old who wants $1 million when he or she is 67, for example, must save $10,000 annually and earn nine percent a year to reach that goal. The best pieces of advice for those 40 and over would be to maximize savings and to invest independently. You should fund your 401(k) to the maximum limit.
With regard to investing independently, consider an individual retirement account (IRA). Many people in their 40s and 50s place money into these accounts, according to the Employee Benefit Research Institute (EBRI), a Washington DC-based research institute. These provide an opportunity to maximize savings by making use of the of tax advantages that come with IRAs. For example, with a Roth IRA, you’ll never pay taxes on earnings.
Traditional IRA contributions have no salary caps, unlike a Roth IRA. This means that anyone with an earned income is eligible to invest. Nonetheless, there are Traditional IRA contribution limits to how much you can put in. The maximum total annual contribution for all of your combined IRAs (Both Traditional and Roth) is: $5,500 for those under 50, and %6,500 for those aged 50 and over.
No matter your age, healthy savings are in your reach. It bears noting, however, that every investor’s situation is unique. The ideas listed above are just a few examples of steps you can take. Before investing your own money, you are encouraged to consult with a reputable financial advisor who can tailor your path based on your age, income level and goals.