Do You Want $2 Million in Your Retirement Portfolio? Here's How to Do It
KEY POINTS
- Many workers think they need $1.8 million in retirement savings.
- Most people don't need that much.
- Starting early and making significant investments can help you achieve your goal.
Many Americans have aspirations for how much they want in their retirement investment accounts, but a recent Charles Schwab survey put a number to workers' nest-egg ambitions. The survey found that most American workers think they need $1.8 million for retirement.
Saving that much money is no easy task, but it is possible -- if you've got a long investment horizon and significant cash to set aside each month. Here's how to do it.
How to reach $2 million in retirement savings
While many Americans may think they need $2 million for retirement, everyone's budget is different. If you live a frugal lifestyle, you'll likely be fine with far less than $2 million in your portfolio.
But if you're determined to save that much, you can do so by investing in a low-cost index fund that tracks the S&P 500. The historic annual rate of return for the S&P 500 is 10.2%. While you won't earn that every year, it's a good benchmark percentage to use for calculating hypothetical future returns.
Here's what that might look like if you do:
| Original investment | Years invested | Annual rate of return | Monthly contribution | Final amount |
|---|---|---|---|---|
| $15,000 | 20 | 10% | $2,800 | $2,025,352 |
| $15,000 | 25 | 10% | $1,570 | $2,015,379 |
| $25,000 | 20 | 10% | $2,700 | $2,023,897 |
| $25,000 | 25 | 10% | $1,475 | $2,011,610 |
| $50,000 | 20 | 10% | $2,425 | $2,003,077 |
| $50,000 | 25 | 10% | $1,250 | $2,016,941 |
As you can see, it'll take at least 20 to 25 years of investing and significant monthly contributions to reach a $2 million retirement savings balance. But the longer you're invested, the less you'll have to contribute each month.
It's also worth mentioning that some of your money will lose value over time because of inflation. And depending on which types of tax-advantaged accounts you use -- like a 401(k) or individual retirement account (IRA) -- you'll likely owe some taxes on the total amount, as well.
How to save for retirement no matter what your goal
Having $2 million in your nest egg might be a good financial goal for some, but most Americans retire with far less. The average retirement brokerage account balance for Americans aged 65 to 74 is $426,070, according to Edward Jones.
So, how do you get started? Here are some of the best ways to begin building your retirement balance, no matter how much you want to end up with.
1. Prioritize investing as soon as you can afford to
One of the best ways to maximize your investment potential is to start as early as you can. The earlier, the better. Compounding interest, where the money you've earned from investing earns even more money, helps you earn big gains -- if you give it time to work.
2. Invest in low-cost index funds
As I mentioned earlier, these funds are one of the best ways to grow your money over time. An index fund that tracks the S&P 500 will allow your money to grow as the stock market grows over time. I own an index fund with an expense ratio of only 0.03%, which means it charges just $3 for every $10,000 of investments.
3. Sign up for your company's 401(k) matching
If your employer offers a 401(k) with a matching contribution plan, don't pass up the free money! Many companies will match your contributions (or half of them) up to a certain percentage of your salary.
For example, if your employer contributes $0.50 for every $1 you contribute, then an annual contribution of $5,000 would be matched by $2,500 in contributions from your employer, giving you $7,500 into your 401(k) plan for the year.
Saving $2 million for retirement isn't necessary for everyone, and you shouldn't fret if you're nowhere near that amount. Speaking with a financial planner can help you determine your own financial goals and how to achieve them.
Our Research Expert
Chris Neiger is a full-time freelance writer with more than 10 years' experience covering personal finance and investing-related topics. He was also a writer for the BBC for three years and marketing manager for two non-profits.
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