12/2/2013 9:45 PM ET|
How to retire with $1 million
Saving a large nest egg is not an impossible goal, especially if you start young. These strategies can help you become a millionaire.
Saving $1 million for retirement is a realistic goal for most workers, but it will take a considerable amount of effort to get there. And there are plenty of fees, taxes and penalties that could make it even more difficult to hit this worthy savings target. These strategies will help you to save $1 million over the course of your career:
Start young. The easiest way to save $1 million is to begin saving at your first job. If you start saving at age 25, you could save just $4,682 per year and reach $1 million by age 65, assuming 7 percent annual returns, according to calculations by David Fernandez, a certified financial planner for Wealth Engineering in Scottsdale, Ariz. "You could do that by maxing out a Roth IRA or saving in a 401k," Fernandez says. "If you wait until 35, the amount you need to save more than doubles." Beginning at age 35, you will need to save $9,894 each year to accumulate $1 million at age 65. If you further delay saving, you'll need to tuck away $22,798 annually beginning at 45 or $67,643 at 55 if you hope to be a millionaire upon retirement at 65.
Set intermediate goals. While saving $1 million might be your ultimate retirement goal, it helps if you set some intermediate goals along the way. "If you've gotten to save $50,000 or $100,000, then you can do something significant that is important to you to celebrate," says Mary Brooks, a certified financial planner for Brooks Financial Planning in Colorado Springs, Colo. "Your enthusiasm is renewed because you really feel like you have gotten someplace."
Keep expenses low. Pay attention to the expense ratio of each investment you choose, and try to select those with low fees and expenses. "Always go for low-cost investments. The only thing you can control is what you pay for stuff," says Walter Romatowski, a certified financial planner for Castellan Financial Advisors in Palo Alto, Calif. "For most people, it probably makes sense to invest in index funds because they typically have lower expenses as compared to actively managed funds. You can pay 0.1 percent or 1 percent, and that makes a huge difference over your lifetime."
Minimize taxes. Saving in a traditional 401k or IRA can reduce your current tax bill and will allow your savings to grow without the drag of income tax. For example, a worker in the 25 percent tax bracket who contributes $5,000 to a traditional IRA will save $1,250 on his current tax bill, potentially allowing him to save that extra $1,250 for retirement. You won't have to pay the taxes until you withdraw the money in retirement. Alternatively, you could pre-pay the income tax using a Roth IRA or Roth 401k, and no additional taxes will be due on the growth when you withdraw the money in retirement or leave the money to heirs.
Get your employer to chip in. If your employer offers a 401k match or makes other contributions to your 401k, you will get to $1 million much faster than by saving on your own. "If you have an employer 401k plan or 403b plan, get the employer match if your employer matches," Romatowski says. "If you don't do that, you are just giving away free money."
Don't inflate your lifestyle. As you get raises, try not to increase your spending. Instead, save at least a part of the extra income. "Every time you get a raise, bump your company 401k contribution up by another percent or two," Fernandez says. "That way, you don't even notice it that you are saving more." Also, consider saving a portion of other windfalls, including inheritances and tax refunds.
Avoid early withdrawals. Obviously, if you tap into your 401k and IRA accounts before retirement, it will be more difficult to accumulate a significant nest egg. The negative effects of early withdrawals also include missing out on valuable compound interest, paying the income tax that will be due on the amount withdrawn and incurring a 10 percent early withdrawal penalty if you are under age 59 1/2.
Don't spend it too quickly. While $1 million may feel like a lot of money, spread over a 30-year retirement, it is likely to provide a modest income. "One million bucks gives you roughly $40,000 of income per year," Romatowski says. "If you save diligently, you can get to $1 million. It just takes a lot of discipline." While becoming a millionaire isn't likely to produce a lavish retirement, gradual withdrawals combined with Social Security payments will likely be enough to provide a comfortable retirement in many parts of the country.
U.S. News & World Report:
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How many lower income people have cell phones? How many have cable? Before you say "I know lots", the stats say 91% of households have some sort of subscription TV, and 86% have cell phones. That's a start. Mine run about $125 per month or $1500 per year.
You want to talk IPODS and $1 down loads, apps, and internet service on those phones?
How many lower income people smoke? At $6.50 a pack, a pack a day is $2000 per year.
Just giving up the three C's (cell, cable, cigs) would put a tidy $3500 minimum a year into an IRA. 30-40 years of that and you at least a quarter to a third of the way there. Smoke two packs, have premium channels, and internet service with your phone and you can double that. Just the phone and the cable and you have 100k after 30-40.
Lots of ways to save that require little more than better choices, and that applies to all income levels.
It can work like they say if you stick to it. I'm retireing on December 31 just shy of being 65. I have saved for 42 years in a 401K and have accumulated about $1.3M. No mortgage or credit card debt and vehicles and toys are paid for.
It is never to late to maximize your 401K contributions. A stable mutual fund works best.
One million bucks at 3% would be just over 30 grand worth of yearly interest, or $2500.00 a month. Maybe more if you can get a 5% rate of interest. Luckily you have another grand coming from some diehard pension or maybe SS, $3500.00 to $5200.00 a month, not bad if you own your home and have a nice little car in the garage. Yeah, I know being an optimist is my best virtue.
But it is possible.
No matter what your age, do your best and save as much money as you can. Even a small retirement nest egg is better than no money at all. You will be amazed how quickly your money will grow and how saving a little now motivates you into saving more as the years go by.
Don't worry about what others have and what you do have. Enjoy your life and don't listen to all the people who say it can be done. Educate yourself on investing. Seek financial advice but do not let the so called experts control your financial plan. Remember you are your best Financial Planner.
I am looking forward to a simple retirement of doing what I want, when I want. My garden, the grand kids and time spent with my wife.
You do have to start early though, and try to start with just enough to get any employer match. And whenever you get a raise, dedicate half of it to increasing your retirement contribution. Repeat over thirty years and you'll do just fine, even in boring index funds.
The most important way to achieve wealth is to have a plan. I started working in my teens. My parents taught me the value of saving, living within your means, staying out of debt, and having a rainy day fund. I took my parent advice to heart and saved at an early age. When I was in my twenties I invested my money in conservative assets as did my parents. I had savings and checking accounts, CD’s, government bonds, and money market funds.
Of course, when I was in my twenties the interest rates were much higher than today and I made good income on that interest. When I was in my thirties I learned to invest in equities, mutual funds, corporate bonds, and other investment vehicles. It was also in my thirties that I took a more active role in my retirement and investment planning.
What I have learned since I was a teenager that if you start saving and investing when you are younger it will be much easier for you when you get close to retirement age. When you are young and save the importance of power of compounding becomes evident when you are older. You can start small and build on your investments as the years go by. You should also take advantage of employer sponsored retirement plans that match your savings contributions. Why give away free money by not taking advantage of an employer match?
When you are older you can grow your retirement accounts by using the catch-up election in your 401K and IRA plans. I am in my fifties and do not plan on retiring for another ten years. I am on track to achieve my retirement and investment goals.
My advice to anyone who would like to achieve wealth is to start saving and investing when you are young, live within your means, stay out of debt, have a rainy day fund, budget yourself, and have an investment and retirement plan.
I already know how how to retire with a million dollars
step one: get a million dollars
step two: retire
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