2/16/2011 4:32 PM ET|
Want to retire with a million bucks?
You can finish your career as a millionaire if you start out smart and stay on the right path. Life will be sweeter just as you're getting more time to enjoy it.
If you're just entering the work force, retirement probably seems like a lifetime away. A million dollars by retirement? That's someone else's dream, right? It doesn't have to be. Here we provide a millionaire's retirement plan. For these calculations, assume an average annual return of 8%, adjusted for inflation at 3% -- a reasonable estimate of average market returns.
Age 25: A good beginning
You're 25 and landed that first job on your career ladder -- congratulations! Before you start living up to your new paycheck's standards, budget your retirement savings. If you have a 401k plan that matches your contributions, use it! These matching dollars are like a guaranteed return on investment. If you don't have a matching 401k, look for a mutual fund through an investment firm with low fees; many now offer target funds, which allocate your investment risk with your targeted retirement year in mind -- great for a beginning investor.
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Choose a Roth IRA if you can; you don't get to deduct your contributions from your taxes, but you'll enjoy tax-free withdrawals at 65. Plan to start by saving about $200 a month to reach your millionaire goal; increasing this monthly amount by annually as your salary increases will only speed up your saving.
Age 35: Rolling along
If you've been following the plan, by now you will have saved about $45,000 and grown into a career with a bigger paycheck. Often, family commitments such as children and a mortgage will seem more pressing than saving for your golden years, but don't make the mistake of slowing down your retirement savings. Now is the time to ramp up your contributions to about $400 a month -- remember that a matching 401k will help you in attaining this amount.
If you have kids and worry about saving for their college, look at it this way: The best way to help them in the future is by ensuring you're financially sound in retirement.
Age 45: Holding steady
You're at midcareer, and things are looking good in your retirement portfolio. Your savings have grown to about $160,000 -- not bad, but it still isn't quite time to slow down. Increase your retirement contributions to about $450 a month or more, and you'll be rolling your way to millionaire status by 65.
Age 55: Close to the finish line
By age 55, your retirement portfolio should be at $400,000 or so. You can start to see the finish line, but begin to wonder about risk. If you've been investing in a target fund, your portfolio has been adjusting its allocation for you; otherwise, look at adjusting some of your investments to reflect a lower risk tolerance. And remember: Your income at, say, age 70 won't be withdrawn for another 15 years -- plenty of time to ride out market fluctuations.
At age 55, expect to really ramp up your retirement contributions, to roughly $600 a month, and more if you can manage it. The more you save, the sooner you can leave the nine-to-five behind.
Age 65: Prudent asset management
You're at the finish line: a millionaire at 65! Since you have no way to add to your savings now that you're out of the workplace, prudent asset management is vital. Keep a close eye on your portfolio so you can make your nest egg last. Protect yourself against inflation as well as market risk, and you'll be enjoying your golden years without financial worries.
The bottom line
With steady savings and smart financial habits, you can retire a millionaire -- maybe even before you're 65.
This article was reported by Claire Bradley for Investopedia.
VIDEO ON MSN MONEY
OK I am a finance professor so I could not resist.
Let's look at this with some realism. A 25 year old wilt a 40,000 per year salary will need an annual income of 130,481 to match the purchasing power of 40,000 today with an average 3% per year inflation rate. The 3% rate has been an average for many years but with QE money printing it may be higher over the next 40 years so 3% is probably a minimum. Remember it is not about 1 million dollars it is about maintain purchasing power which is the only purpose of money in the first place.
OK so let's use the rule of thumb sustainable withdrawal rate of 4 %. This means you would need to accumulate 3,262,025 by the time you are 65. To do this at a 6% average rate of return would require an annual saving rate of 21,077 per year or over 50% of your pretax income, impossible. how about 8% average return and you get 12,591 per year. maybe.
Can add in social security if it still exists. Let's assume a 40% replacement rate so 130,481x.6=78,288 will need to come from savings and at a 4% withdrawal rate you will need to accumulate 1,957,200 which requires an 12,646 at a 6% average return and an annual contribution of 7,555 at an 8% return.or 19% annual savings.
Ok you can see you need to look at the numbers if you need a rule of thumb you should save 15% of your salary every year form 25 till you stop working and you will be able to retire at 65 on 80 to 100% of your pre retirement income.
The word needs to go out..if you want to retire save 15% of your income and don't touch it for any reason...how many people do this?? That's the problem
Just make sure you never, ever get an illness that requires medical specialists. Insurance will say they cover 80% of the approved procedures and before you know it, you are deep in debt, insurance stops paying and lawyers and collection agencies ruin your life.
To retire with a $million, never ever get an illness.
Not one peep here about the 800 pound guerilla that devours over half of all retirement dream savings... divorce.
The only protection here is to never forget the 3/4 million lawyers in this country that are living quite nicely on this legal bonanza. Sadly, this financial ruin can be largely avoided with a few prudent decisions by both parties before, during and at the split.
I have had 6 figures savings twice early in my life only to watch the S&L crisis destroy my first home mortgage purchase, the tech/.com bust, Enron/Worldcom, 9/11 and now this recession/depression which has completely stalled any chances of my retirement.
I am 51 on significant salary cuts and more education and hard work are certainly no guarantee of the American dream I once knew. Boy was I naive of government's corruption and influence in Wall Street and the markets. It has completely destroyed the entire concept of savings & investment. Not to mention surely dimenishing buying power of the future dollar down the road. I was working with some very significant financial planners who got duped too. So if the markets are false, the bank/corporate earnings & information false, creative accounting never audited by the SEC how do you really ever have an honest chance to build wealth for retirement. Our government's credibility is gone. Our politicians corrupt. All bought and paid for. How many have gone to jail inside our government who told the SEC to just look the other way? How many of their lobbiest went to jail? It's time to walk like the Egyptian my friends. The system is broke. It's time we fixed the system.
you think this recession was bad? just wait till future generations start reaching retirement age that were brought up in this " the government will support me if im lazy" attitude and " the market is a scam" attitude .. im 26 and have been saving trying to learn what i can about money and investing and i WILL be ready to retire in the future but its scary that such a small percentage of people my age even care to save a thing . what a scary world thats gonna be
The amount you need to retire is based on your lifestyle which of course in driven by your preretirement income. So if you earn 30,000 per year you need somewhere between 80 and 100 percent of this income or 24,000 to 30,000 dollars per year when you start retirement and if you want it to last 30 years which is what you need to plan for..remember running out of money when you are 85 you do not have the option to go back to work, you need to accunulate a nest egg that will allow you to withdraw at a 4% per year rate. So take your income subtract social security and divide by .04 and you get what you need. so 30,000 minus 12,000 social security means you need to make up 18,000/.04=450,000. of course this does not take inflation into account and it is a ballpark estimate but you need to start somewhere.
I am not sure I agree that the cards are stacked against. We can't blame Wall Street for our own imprudence.
Prof. - I couldn't help but catch the teacher on this one.... You forgot adjusting the contribution for inflation over the 40 year period. This actually works out to having over $2.5MM at an 8% return and 15% contribution, rather than a flat contribution amount.
Your point is 100% correct however, people need to save and invest for retirement. The market will have its ups and downs, but even putting money in Inflation Protected Treasuries is better than thinking... "I'm not going to contribute to my 401k because Wall St. is out to screw us!" Although I'll stick with the market and hopefully be able to retire earlier because of a better return!
We (Federal Government) has to pay $205,000,000,000 interest on the current debt this year. That's the good news ! The bad news is we have to pay $240,000,000,000 interest next year.
Why do the politicians fail to understand that if you spend more than you take in you can't save ?
It's really not as hard as it sounds. The wife and I gross around 72k. At 32 and 33, respectively, we have around 130k between our retirement accounts. I started at 22 contributing 10% plus my 3% company match. When I got a raise, I bumped my contribution by that percentage. During the Great Recession, I contributed the max of 30% until the DOW leveled out at 10,500 when I bumped it back down to 15%. According to this article, I'm around 12 years ahead of the game as a result.
I've never carried credit cards, so I've always been forced to live within my means. I don't have kids, so that make life less expensive. I rent instead of owning my residence, so my monthly bill are minimal. Buying a home is my next financial goal. I've never had a cell phone (the wife does) and I dropped cable TV service a few years ago. Not carrying those two services saves me probably $110 a month.
Great! I am 25 now ... if I follow the plan I will have $1 million 40 years from now! I can then safely take out 3% per year during retirement (according to other MSN experts). So I'll have $30,000 per year in retirement starting in 2055. That's the equivalent of roughly $7,000 per year inflation adjusted! Whoopee!
Hard to believe people take the time to write these articles and don't think through even the basics.
Some of us have work very hard in our jobs and tried our best to provide, but after all said and done, life takes some crazy twist and you end up with nothing at the end of the road.
I'm nearly 69,and wished I'd read something like this"want to retire a millionaire" I would'nt
be worried like I do now.
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