WASHINGTON — Everyone knows they need to save for retirement — especially with company pensions becoming extinct over the next generation.
At some point you’re going to stop working and will have to live on whatever you have saved, plus whatever you’re entitled to receive from Social Security.
Having worked with many people who have saved $1 million or more, there are patterns of behavior that they all possess that have helped them to accumulate their wealth. While there’s no denying that it helps to start with a well-paying job, earning more money is no guarantee that you’ll be set for retirement.
If you want to have $1 million or more saved for retirement, here are five tips to help you join the millionaire retiree ranks.
1. Start saving now
Regardless of your age, make saving a priority. Those who begin to save in their 20s and 30s will need to put aside a smaller amount on a regular basis since they have more years to save and invest. But what if you’re in your 40s and haven’t saved much? You still have at least 25 years of savings ahead of you.
Bloomberg’s 401k Savings Calculator is easy to use and will give you a pretty good idea of how much you will need to save to reach your retirement savings goals. Let’s say that you are 40 years old, you make $100,000 a year and you haven’t saved anything for retirement thus far. We will be very conservative and assume that your 401k offers no employer match and you expect to make an annual investment return of 6 percent. To have $1 million in your 401k by age 65, you will need to put aside $18,000 or 18 percent of your annual salary every year. In fact, $18,000 is the maximum amount that you can defer in 2015. If you are over 50, you can defer an additional $6,000 per year.
Doing this exercise may feel like having cold water thrown in your face — after the initial shock, you’re wide-awake. Once you make the decision to know your situation, you can act to change and improve it.
2. Make it automatic
Those who have accumulated wealth made a decision to save a portion of what they earned and have practiced this discipline over time.
The first place most start is with a 401k or other employer-based retirement plan. Decide what percent or dollar amount to defer from each paycheck and stick with that plan. The calculator mentioned about will give you a good idea of what you should set aside to meet your retirement goal. If you’re juggling debt and saving, then defer a smaller amount this year. As you pay off the debt, consider increasing the amount you’re saving, rather than spending it all.
3. Don’t touch your 401k until retirement
There’s a great Bloomberg article by Suzanne Woolley that I recommend everyone read, “How a Harvard Economist Screwed Up — and Then Saved — Her Retirement.” It illustrates how easy it is, even for a Harvard economist, to get caught up in spending too much.
Among the things she admits doing wrong is taking a lump sum buyout of her pension, which she intended to invest, but spent, and tapping her after-tax 401k to pay for her son’s honeymoon. The article points out that even when mistakes are made, there’s still time to recover from them and live well in retirement.
It can be tempting to live large, or at least larger, especially when you’re in your peak earning years and many expenses of life’s bigger expenses, from purchasing a home to raising and educating your children, are behind you. But if you want to count yourself among those who have enough money in retirement, then resist the urge to use your retirement savings like a bank account.
4. Save outside of your 401k
If you are maxing out your 401k or other employer-based retirement savings account, then consider saving even more in an IRA or brokerage account. You can set aside up to $5,500 if you’re under age 50 or $6,500 for age 50 or older in an IRA. These contributions may be partially deductible or not at all if your income is over certain limits. To know whether your contributions will be deductible, then check out Fidelity’s IRA Contribution Limits calculator.
If there is no tax benefit to saving in an IRA, then you may want to consider saving in a personal brokerage account. There are many brokerage firms that offer investment options from stocks, bonds, Exchange Traded Funds (ETFs) and mutual funds. Most have low fees and provide free investing advice. Just keep in mind that they are also in the business of selling investment products, so be sure that the advice you are getting is in your best interest.
5. Seek advice
To get clarity around your savings goals and to help manage your investments, I recommend seeking professional financial advice. As those savings grow, investing and managing hundreds of thousands — or even millions — of dollars can be daunting. The stakes grow as your savings grows, and a good financial adviser can help you avoid mistakes and take advantage of potential opportunities. An adviser will also make sure no one takes advantage of you.