If becoming a millionaire was easy, then everyone would do it. But if you look at it from the standpoint of retirement savings and not money in your bank accounts, then it's not as high of a climb that it might seem. You may be sitting there with $20,000 in a checking account and stacks of monthly bills and think, $1 million is not even remotely on my radar. But it can be done with some strategic planning and investing, and above all, time.
Let's say you're in your 20s and landed your first big job out of college and don't have much in the bank or any retirement savings yet. Or, say you're 40, haven't been saving much for whatever reasons, just started a family, and now you want to get serious about building a nest egg.
You could achieve that $1 million figure in 25 years in time for retirement, while paying for all your other expenses along the way, if you start now. Here's how.
Budget and save with the 60-20-20 rule
Investing is going to be a huge part of your path to $1 million, but you need a roadmap for how you're going to get there and it starts with budgeting. A good way to wrap your head around your expenses is by using the 60-20-20 rule. This refers to the percentages of your income that should be set aside for needs, wants, and savings and investing.
The 60 means that 60% of your income should go to needs -- things you can't live without or have to pay, like your rent or mortgage, car, insurance, food, utilities, child care, student loans, and healthcare (although a lot of that is already taken out of your paycheck).
The first 20 refers to wants, which are non-essential expenses. That's eating out, going to movies, cable TV, vacations, video games, all that good stuff that makes life fun. This should represent 20% of your income. The final piece is savings. You should try to set aside 20% of your income each month for savings or investing.
So, if you and your spouse clear $100,000 per year after taxes, that comes out to $8,300 a month. About $5,000 would go to needs, $1,700 to wants, and $1,700 to savings and investments.
Some people use a variation called the 50-30-20 rule. Here, 50% of your money goes toward needs, while 30% goes toward wants. The same 20% savings applies to both.
Organize your expenses into these three buckets and see if you're on the right track. If your needs or wants are too high, you may be spending to much on big ticket items, like your home or cars. Or you may need to cut back on some of those wants (i.e, discretionary expenses). Because to reach $1 million, you need to prioritize savings and investing.
Take advantage of your employer-sponsored plan
With that hypothetical $1,700 a month set aside for savings and investing, one absolute must is to contribute as much as possible to your employer-sponsored retirement plan. If you contribute say 8% of your salary to your plan, and get an employer match of 4%, which is the average, you'd be contributing about $333 per month to the plan. If your spouse did the same thing, that would be another $333 per month. Combined, that's $667 per month set aside in your retirement plans -- or about 40% of your money allocated to savings and investing.
Using a rough estimate from a 401(k) retirement calculator, which can be found online, that would net you and your spouse about $400,000 each, or $800,000 total, after 25 years. That's with the assumption of a 2% salary increase per year over 25 years with an average return of 7%, which is a conservative estimate, considering the S&P 500 has averaged a roughly 10% annual return over time. That alone gets you close to $1 million by the time you retire.
Develop an investment strategy
With roughly $700 per month invested in your employer-sponsored plan, that leaves you another $1,000 per month in household income to save and invest elsewhere. That $1,000 represents about 60% of your money allocated to the savings and investing bucket. If you split that in half and put $500 per month in a savings account, you would be building up your savings to the tune of about $6,000 per year. This money could be used for emergency expenses, to pay down debt, or just as a cushion in the months that expenses are up.
The other $500 per month could be invested in a portfolio of stocks, exchange-traded funds (ETFs), or mutual funds for other long-term needs, like college costs, a new expanded home, or eldercare. If you invested $500 per month in ETFs that track the S&P 500, which has returned about 10% per year over time, that initial $500 investment, contributing $500 per month, would net you about $660,000 in 25 years. Combine that with your employer-sponsored plan and savings, and you'd be well over $1 million.
Of course, you'd eventually have to subtract the money you saved to pay for college, which could be $150,000 to $200,000 per child without aid or scholarships. But you'd still have enough to cover that and then some. And this does not even include Social Security.
So, with a little planning and a lot of time to make your money work for you, you could accumulate $1 million in retirement funds in 25 years, even if you started from nothing.