Building wealth
Almost anyone can become a millionaire if they make a commitment to save early in their career and stick with it over several decades. Savvy investors will be helped along by employer contributions and tax breaks and will skillfully avoid high fees that reduce investment returns. Here’s how to save $1 million in time for retirement.
Start saving at an early age.
If you start saving for retirement at age 25 and save $4,830 per year, or about $400 per month, and earn 7 percent annual investment returns, you will accumulate just over $1 million by age 65. Compound interest does much of the work for you. 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.
Become a super saver.
An empty nest gives you an opportunity to focus on filling up your retirement accounts. It takes some serious saving to become a millionaire in the years leading up to retirement, but it’s not impossible, especially if you have worked your way up to a job with a high salary. A worker who saves a little over $36,000 per year between ages 50 and 65 and earns a 7 percent annual return that is compounded monthly will achieve millionaire status by retirement.
Capture employer contributions.
If your employer provides a 401(k) match, you can get by saving a little less and still hit $1 million by retirement. A worker who starts saving at 25 and gets a $1,500 annual match could save $1 million by age 65 by tucking away as little as $3,330 per year. A worker who starts saving at 35 and gets the same match would need to tuck away $8,705 annually to hit $1 million by retirement.
Vest in your retirement accounts.
Job changers need to be careful that they get to keep employer contributions. Many companies have vesting schedules that prohibit departing employees from taking the match with them until they work for the firm for a specific number of years, or they allow workers to keep a portion of the match based on their years of service. When making career decisions, remember to factor in any retirement savings you might be leaving behind and make sure the new opportunity is worth it.
Save money on taxes.
You can also use tax breaks to grow your money faster. If you put $5,000 in a 401(k) and you are in the 25 percent tax bracket, you will save $1,250 on your tax bill. Income tax won’t be due on your contribution until you withdraw it from the account.
Watch out for taxes in retirement.
It’s important to note that you will need to accumulate more than $1 million in a retirement account to have a million dollars to spend in retirement because you still need to pay income tax on each distribution. But if you save $1 million in an after-tax Roth IRA, no income tax is typically due on distributions in retirement.
Avoid high-cost funds.
Your investments will grow faster if you minimize the fees that are deducted from your returns. If you save for 40 years between ages 25 and 65, but a 1 percent annual fee reduces your returns from 7 percent to 6 percent, you will need to save about $6,260 per year to reach $1 million by retirement, instead of $4,830 per year without the extra 1 percent fee. Take care to seek investments with low expense ratios.
Watch out for penalties.
Don’t let retirement account penalties reduce your retirement savings. There’s a 10 percent early withdrawal penalty if you take money out of a traditional IRA before age 59 1/2 and a 50 percent penalty if you fail to start taking traditional IRA withdrawals after age 70 1/2. Also, watch out for taxes and penalties when rolling money over from a 401(k) to an IRA or new 401(k) when you change jobs.
Don’t plan on a lavish retirement.
While becoming a millionaire seems like a worthy retirement goal, the money is only likely to produce a modest retirement income when spread over several decades of retirement. If you draw down 4 percent per year, this nest egg will generate about $40,000 of annual retirement income. When combined with Social Security income, $1 million in savings could produce a comfortable retirement lifestyle in some parts of the country, but in high-cost cities, it might not be enough.
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How to Save $1 Million by Retirement originally appeared on usnews.com
