For many Americans, saving $1 million won't be enough for retirement -- you'll need several million in the bank to maintain your standard of living. This is especially true if you aren't retiring for a long time and inflation will eat away at the buying power of your nest egg.
So how can you end up a multi-millionaire in retirement? It's easier than you think. Just follow these five steps.
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1. Start saving early
Amassing a multimillion-dollar nest egg takes time. If you want to succeed, it's best to begin investing early. This allows lots of time for compound growth, which happens when the money you've invested earns returns that are reinvested and earn returns of their own.
While it may be a challenge to start investing in your early 20s, even setting aside a small amount when you're young can make a huge difference in the ultimate size of your nest egg. If that ship has sailed for you, start investing what you can now -- even if it isn't much -- so you can make compounding work for you.
2. Set a clear savings goal
When you want to hit a lofty savings target, it's helpful to know how much money you'll need to invest in order to do that. That means you should calculate exactly how much you need to save from now until your preferred retirement date to end up with a multimillion-dollar nest egg.
There's a helpful calculator on Investor.gov that allows you to input your current account balance, your projected returns, and your retirement timeline so you can find out the monthly investment you must make.
3. Automate your savings
Knowing your retirement goal is half the battle -- you also have to actually invest the amount you've determined is required. It's a lot easier to do this if you make the process automatic.
If you have a 401(k), contributions can be taken directly from your paycheck. This is ideal because you can make sure the right amount of money is being saved for retirement and live on what's left over.
If you don't have a 401(k), investing in it isn't enough to hit your retirement target, or you'd prefer another tax-advantaged plan, you can also set up automatic transfers to other retirement accounts on payday. Your bank or brokerage should make this possible.
4. Take advantage of tax breaks
Since hitting a multimillion-dollar savings target is challenging, you'll need to take all the help you can get. Fortunately, Uncle Sam subsidizes your retirement savings efforts with a number of tax breaks.
Both 401(k) and traditional IRA accounts allow you to save on taxes in the year of your contribution. If you invest $10,000 a year and can deduct that entire amount from your taxes, you could save as much as $2,200 if you're in the 22% tax bracket -- or more if your bracket is a higher one. This means your contribution would only reduce taxable income by $7,800.
You also have the option to defer your tax savings until later using a Roth IRA. Roth accounts don't allow a deduction in the year of your contribution, but allow for tax-free withdrawals as a senior. This could be a better approach if you suspect your tax rate to go up as you age.
5. Invest wisely
Finally, once you've put your money into a tax-advantaged retirement account, you should invest it in a good mix of different assets that you feel is well-matched to your current risk tolerance.
This could include stocks of trusted companies in different industries, exchange-traded funds, or both. Just be sure you watch your fees and adjust your investments over time to a less risky mix as you get closer to retirement and have less time to recover from downturns.
By taking these five steps, multi-millionaire status should be within your reach by the time you hit retirement.
