Everyone doesn't need $1 million for retirement. But you might, if you don't have a lot of guaranteed income sources after you've stopped working or think you'll have high expenses.
Saving for this goal can seem intimidating. But with some planning, hard work, and discipline, it can be done. Here's how.
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Slow and steady wins the race
You'd need $33,333 saved each year for 30 years if you wanted to save $1 million with just your contributions. But investing can help you achieve this goal with a lot less money. An asset allocation model that consists of 100% equities grew at an average rate of 10.29% per year between 1926 and 2019. If you saved and invested $5,250 a year and earned this average rate of return over 30 years, your money would grow to $1,006,316.
If you're starting to save late and don't have 30 years left before retirement, you can still reach this goal with higher annual contributions. If you have 25 years until retirement, saving $8,900 each year earning this rate of return could get you to $1,008,469.
Saving $15,500 a year for 20 years would grow your accounts to $1,011,949.
Having time on your side clearly helps. You can save two-thirds less each year if you have 30 years to save instead of 20. One of the benefits of starting late, though, might be that people typically earn more each year and can afford higher contributions. Households with wage earners between the ages of 25 to 34 have an average total income of about $49,482, while homes with individuals between the ages of 45 and 54 have average total earnings of $73,512.
Small tweaks can add up big
If these amounts are still out of reach, there are ways you can find extra cash for saving. If you have access to a 401(k) at work, a company match can help you save more with less of your actual money. Your employer usually matches a certain percentage of your income up to a cap. So if you make $55,000 and your employer matches 100% of your contributions up to 6% of your salary, then if you add $2,625 to your 401(k), your company will too. This will give you the $5,250 needed each year to reach this goal.
If you don't have access to a 401(k) and a company match program, you can try cutting expenses. If you can save $4,300 a year, cutting $1,200 a year in expenses -- the equivalent of $100 a month -- could help get you to your $5,250 annual savings goal.
Creating a budget, tracking your monthly spending, and distinguishing between things you want and things you need can help determine which expenses to eliminate. You don't have to get rid of everything you enjoy doing, but by reducing some of your unnecessary spending like streaming services and dining out, you can redirect this money toward saving for retirement.
Achieving this goal with less risk
What if you can save enough money but your risk tolerance can't handle being 100% invested in stocks? If you are someone who gets nervous whenever the stock market has a down day, adding some safer investments like bonds to your portfolio may help you stay invested for the long term. This will greatly reduce volatility, which can give you peace of mind.
In exchange, you'll give up some returns -- how much depends on your asset allocation model. A portfolio consisting of 60% stocks and 40% bonds earned an average annual return of 8.77% from 1926 through 2019. With this rate of return, you'd need to save $7,250 each year for 30 years, and you would end up with $1,029,833; or $12,000 a year for 25 years for $1,024,008.
You might also feel comfortable with risk now but less so as you age. In that case, you should adjust your contributions accordingly each time you reduce your stock exposure. You can use a simple calculator that takes into account how much you've already saved and your new expected rate of return to determine just how much.
You can save $1 million for retirement without making a ton of money each year. Even if you can't save the exact amount needed every year, saving whatever you can now will help ensure that you're not starting from zero. Having a concrete plan that involves consistently saving, and investing can help.
