Almost anyone can retire a millionaire. Unfortunately, unless you're born into immense wealth, build a successful company, or win the lottery, you'll probably need planning, good decisions, and time to accomplish that goal.
The good news? A retirement savings hack has created many millionaires and is unlikely to stop anytime soon.
I'm talking about using compounding -- in other words, making your money work for you. It sounds almost too simple, yet the statistics show that more people might need to hear this. The typical U.S. household has just $200,000 saved for retirement at age 65; that's well short of a million bucks.
But with compounding, you can retire a millionaire on a modest wage. I'll show you how to make compounding do all the financial heavy lifting for your retirement savings, and what pitfalls to look for.
Compounding is a numbers game
When you boil it down to its simplest terms, building wealth with compounding is all about math. Once you realize this, creating a plan to achieve your goals is much easier.
Compounding depends on three things:
- How much you save
- How early you start
- The return on your money
These three things will depend on your circumstances, such as your age, income, lifestyle, and risk tolerance. The compounding effect is more powerful the longer it works, so the earlier you start saving for retirement, the less you need to compensate in other areas.
The chart below shows how much you need to invest monthly to retire a millionaire at 65, depending on when you start and how fast your money grows.
|
Starting Age |
12% Annualized Growth | 10% Annualized Growth | 8% Annualized Growth | 6% Annualized growth |
|---|---|---|---|---|
| 25 | $103 | $179 | $309 | $522 |
| 35 | $325 | $481 | $705 | $1,021 |
| 45 | $1,087 | $1,380 | $1,744 | $2,190 |
| 55 | $4,444 | $4,940 | $5,486 | $6,088 |
Data source: Calculations by author.
How fast your money grows will depend on what you invest in. For example, stocks and cryptocurrencies offer higher potential returns, but are more volatile and riskier than Treasury Bills. You should diversify across different investments and avoid taking more risk than you're comfortable with. A professional financial advisor can help you decide how to invest your savings.
Good financial habits can make saving for retirement easier
As you saw in the chart, retiring as a millionaire is far easier when you start early. That doesn't mean it's out of reach if you're older -- you'll need to save more, but you're also likely to earn more. Statistically, incomes for most Americans peak between the ages of 45 and 54. The problem for most older savers is lifestyle creep: It's easy to spend more money as you make more money.
Regardless of income or age, anyone struggling to save enough should review their household budget and finances. Avoid high-interest debt, like credit cards -- the wonders of compounding there work against you, not for you. Credit card interest rates can go well above 15% or 20%, leaving people in a seemingly bottomless pit if their balances get high enough.
Think twice before buying that new vehicle with the fancy options. Some people pay over $1,000 monthly to finance their car or truck, an amount that could be enough for them to retire as millionaires if they invested that money instead.
You don't have to deny yourself life's luxuries entirely, but you may need to decide your priorities. Compounding is solely about numbers, not emotions. The best way to ensure you retire wealthy enough to enjoy your elder years is to make compounding work for you to the extent you can.
Make smart money moves to help yourself
There are additional hacks you can take advantage of. Consider using retirement accounts; this could include one offered through your employer, such as a 401(k), plus individual accounts such as traditional and Roth IRAs. These accounts often feature favorable tax treatment that can lower your tax bill during either your working years or retirement.
If you have a 401(k), your employer might match your contributions up to a certain amount, which might be as close as you'll get to free money.
Remember to learn about the ins and outs of whatever types of accounts you save with, and don't hesitate to consult a professional if you need help. Saving for retirement is a personal journey -- but compounding can make it easier for everyone.
