Earning $1 million annually and having $1 million are two entirely different states of the world. While making seven figures in any year is a remarkable feat, saving $1 million over a traditional career is much more within reach -- even if you aren't a high-income earner.
Here are four realistic paths to a million-dollar retirement.
1. Start investing as soon as possible
One of the very core principles of good financial planning is to start saving and investing as early as you possibly can. Small amounts of money invested consistently from the start of your career can yield major dividends -- both literally and figuratively -- by the time you reach retirement age.
For instance, take someone earning $75,000 a year who saves $4,000 annually in a Roth IRA. Even though Roth IRA contribution limits are higher, assume this person only saves $4,000 every year and -- somewhat shockingly -- never receives a pay raise over that time. Imagine that by investing in simple, low-cost index funds, they're able to earn an investment rate of return of 8% on average.
Assuming this individual has a career that starts at 22 and goes until the age of 62 (when Social Security payments become possible), they would have a staggering $1,036,226 at retirement.
This example illustrates the power of compound interest, which refers to the exponential growth that occurs when investment interest accumulates over time.
2. Increase your savings rate
In the above example, the individual saved just over 5% of their pre-tax income to arrive at an investment balance of over $1 million after 40 years of work. If current trends are any indicator, many people now seek to avoid 40 years of work through diligent saving and investing early on in their careers.
One of the key ways to reach $1 million even sooner is to simply save and invest more. Continuing the previous example, say instead of saving $4,000 annually, the individual saves $8,000 a year.
By upping their savings rate to over 10%, they get to $1 million after 31 years -- nearly a decade faster than if they were only to save $4,000 every year. Hitting a higher savings rate isn't an easy task, but doing it early and often can cut many years off of your working life.
3. Boost your income
Clearly, it's easy to put more away when you have more coming in. Professions that require many additional years of schooling, like medicine and law, will often come into the saving and investing game well after their peers but will also earn quite a bit more on average.
It stands to reason that a higher monthly income allows for more saving, and this is typically true even if a high debt load is in the picture. Higher-paying professions tend to make it easier to max out tax-deferred retirement accounts, like workplace 401(k)s or solo 401(k)s. When this is done year after year, balances compound at lightning speeds.
If you're just starting out -- or even if you're not -- consider ways to boost your income. This may mean a career change, or it may mean simply adding more hours on to your current schedule. Either way, take steps to build your investments.
4. Do better with your investments
This is a two-pronged approach: First, ensure that you earn at least the market return by owning total market index funds with the lion's share of your portfolio. Picking stocks based on "feel" is likely to land you in hot water, and selling investments too soon is likely to inflate your tax bill. Be prepared to hold funds for the long term, and stick to a passive, whole-market strategy.
Second, be sure to keep costs as low as possible. A traditional advisor's fee can run 1% or higher, and when that's translated to dollar terms, it can leave you six figures in the red over a period of many years. As time goes on, the compounded value of these fees can meaningfully eat in to the value of your retirement portfolio. Ensure that you are taking a low-cost approach to maximize the value of your hard-earned money.
Make it a reality
Earning a decent salary, adhering to time-tested financial planning principles, and staying consistent over the years are all part of the millionaire picture. Accumulating $1 million is definitely possible when armed with the right knowledge, so be sure to know the details and apply them in your own investing life.