Saving at least $1 million before retirement could go a long way toward helping to provide financial security in your later years.
A million-dollar nest egg would produce only around $40,000 in annual income if you follow the 4% rule, which says you won't run short of funds if you withdraw 4% in your first year of retirement and then adjust for inflation each year. And most retirees will need at least that much (if not more) to replace their preretirement earnings, with help from Social Security.
But saving $1 million is within reach for most people. Following these four steps can help make it happen.
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1. Set a retirement savings goal
Becoming a millionaire is within reach, but it all depends on how old you are when you start investing and the likely returns you'll earn.
The only way to know what it will take to hit your target is to set a personalized goal based on the parameters that apply to you. Investor.gov has a calculator you can use in order to do this.
But the chart below can give you a rough idea of what you'll need to do. It shows the monthly amount you'd need to invest to end up with $1 million depending on the number of years until retirement (and assuming that you're starting from $0 and earning an 8% average annual return.)
| Years Until Retirement | Monthly Investment Needed to Become a Millionaire |
|---|---|
| 10 | $5,752.44 |
| 15 | $3,069.12 |
| 20 | $1,821.01 |
| 25 | $1,139.89 |
| 30 | $735.61 |
| 35 | $483.60 |
Data source: Calculations by author.
As you can see, waiting to begin will require a lot more effort to get you there. Knowing the amount you need to invest gives you a starting point to work from.
2. Take advantage of tax breaks for retirement savings
Tax breaks for retirement savings help you invest the necessary amount, with the government subsidizing your savings.
Say, for example, you invest with pre-tax dollars toward a goal of $735.61 per month, or $8,827.32 per year. If you're in the 22% tax bracket and can invest this entire amount in your 401(k), the tax savings could add up to as much as $1,942.01. So your take-home pay would actually be reduced by only $6,885.31.
If you are contributing to a 401(k), you could also be entitled to an employer match. If your company gives you free money for investing by matching some of the contributions you make to your account, you have to save less to hit your target.
Examples of tax-advantaged accounts include traditional 401(k) and IRAs, if you'd prefer your tax break upfront. You could also invest in Roth accounts. While your contributions won't save you on taxes in the year they're made (since you'll invest with after-tax dollars), you'll avoid paying taxes on withdrawals from Roth accounts, so your money will go further as a retiree.
3. Automate your contributions
After you've figured out exactly how much to invest, arrange for that amount to be transferred automatically into your tax-advantaged retirement plan.
This ensures nothing gets in the way of your monthly investment, since the money is taken out before you receive your paycheck in the case of a 401(k) or on payday if you set up the transfer yourself into an IRA.
4. Invest your money
You'll typically have to invest to earn the returns needed to help build wealth. The returns on your investments are reinvested, making hitting your savings target much easier.
If you're good at picking stocks (or interested in learning how), you may be able to beat the 8% returns mentioned above in the projections for how much to save. But if you don't want to take the time to invest in individual shares, an S&P 500 index fund is a simple option that has averaged around a 10% annual return over many decades, so the risk is relatively low.
By taking these four steps, you should be more able to enjoy your retirement with the financial security a seven-figure nest egg can offer.
