Here’s a three-step strategy to retire as a multimillionaire.
When it comes to retiring with a seven-figure nest egg, there are some circumstances that aren’t easy to control. For example, if you earn $50,000 per year, it will be tougher for you to retire as a multimillionaire than it will be for someone who earns $150,000. There’s no way to predict or control future legislative changes that might impact how we save for retirement.
Still, there’s still a pretty surefire strategy to retire with $1 million, $2 million, or several times that much — and it isn’t even that complicated.
Be a super saver
The average retirement savings rate in the United States is around 6%. This means that the average person who makes $100,000 per year saves $6,000 for retirement.
Most retirement planners agree that you’ll need about 80% of your pre-retirement income to sustain the same quality of life after retirement. A 6% savings rate isn’t likely to get you there. I generally advise people to aim for a savings rate of about 10% of their salary, excluding any contributions to your retirement account that your employer makes. The more you set aside, the better your chances of a multimillion-dollar nest egg will be.
You don’t have to get to that level right away. Try increasing your savings rate by 1% of your income each year until you reach the target.
Don’t be afraid to invest
One common mistake is setting aside money for retirement in a savings account or CD. While it’s technically possible to get a seven-figure retirement account by keeping money in cash, the majority of people who retire with a large nest egg get there by investing.
Specifically, the best way to invest for retirement is with a portfolio of stocks and bonds appropriate for your age, risk tolerance, and life goals. Whether you should invest in index funds or individual stocks is a topic for another article, but here are a few key points to know:
- The stock market (specifically, the S&P 500 index) has historically produced 9%-10% annualized returns over long periods of time, but can be quite volatile over the short run.
- Bonds, also known as fixed-income investments, have historically averaged returns in the 4%-5% range, but with significantly less volatility than stocks.
Stocks are best suited for younger investors who want to focus on growth and have the time horizon to ride out any short-term fluctuations. Bonds are more appropriate for older investors who want income from their investments with less volatility.
One common rule – known as the “rule of 110” – says that by subtracting your age from 110, you can find your ideal stock allocation. A 40-year-old should have roughly 70% of their portfolio in stock-based investments, with the rest in fixed-income ones.
To maximize your investment returns, save as much as you can in tax-deferred retirement accounts like 401(k)s and IRAs. You won’t have to pay tax on your dividends and capital gains each year as you would with a standard brokerage account, helping your money compound much faster.
Let time do the hard work for you
Let’s say you want to retire with $1 million. If you start at age 35, you’ll need to invest about $880 per month to retire a millionaire at age 65, assuming an annual average return of 7%. If you get started at 30, the monthly investment amount drops to about $600. And starting at 25, you would only need to set aside about $420 each month. This figure includes the money you contribute to your retirement accounts and regular brokerage account, as well as any employer matching contributions made on your behalf.
If you want to retire with several million dollars, multiply these figures. Here’s a quick reference chart that can give you an idea of how much you’ll need to set aside.
|Starting Age||Monthly Savings Needed for $1 Million||Monthly Savings Needed for $2 Million||Monthly Savings Needed for $5 Million|
No extraordinary measures needed
If you were expecting some “tricks” to build a huge retirement account, I’m sorry to disappoint you. But the lack of complicated strategies is kind of the point.
As Warren Buffett once said, “You don’t need to do extraordinary things to achieve extraordinary results.” This maxim is especially true when it comes to saving for retirement. Thanks to the long-term return potential of a diverse investment portfolio and the efficiency of tax-advantaged retirement accounts, building a seven-figure retirement nest egg might be easier than you think.
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