Are you hoping to retire with a seven-figure nest egg? Becoming a millionaire by retirement is a lofty goal but can help ensure your later years are comfortable and free of financial stress.
If you want to have substantial wealth as a senior, though, there are a few key steps to take right now, before it's too late. Here's what you need to do.
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1. Choose your retirement investment account carefully
When you're hoping to become a millionaire retiree, it makes sense to take advantage of tax breaks for retirement investing. But you'll need to carefully consider where to put your funds.
You'll have a choice between keeping retirement investments in traditional accounts or Roth accounts, such as a traditional IRA or 401(k) or a Roth 401(k) or IRA. If you invest in a traditional account, you'd get an upfront tax break in the year in which you contribute to your account but be taxed on withdrawals as a retiree. If you opt for a Roth, the reverse would be true.
If you expect to be a millionaire in retirement, you might be in a higher tax bracket as a senior than you currently are. You could also find your Social Security benefits are rendered taxable by your high income. If you don't want to give up a substantial share of your monthly income to the government, choosing to invest in a Roth could be a smart move.
2. Be realistic about how much income your investments will offer
It's important to think about what your idea of retirement is -- and what amount of money you're going to need to live your dreams. Having a million-dollar nest egg may sound like it will set you up for life, but you can't just withdraw a ton of money every year if you have a $1 million brokerage account balance. If you maintain a safe withdrawal rate and take out about 4% of your account balance, a $1 million nest egg would only produce about $40,000 in annual income.
You also have to take inflation into account. If you're retiring 30 years from today, that $40,000 in annual income that your million-dollar nest egg would produce would only have the buying power of about $22,000 of today's dollars (assuming a 2% annual inflation rate). While this may be enough when combined with Social Security, it's probably not your idea of a luxury retirement.
Aim to have an investment account balance equal to about 25 times the income you hope it will provide. So if you want your investments to produce $80,000 of income in the future, you'd need $2 million saved. Think about how inflation will affect your buying power and the amount of money you hope to spend each year when setting your savings goal.
3. Watch your investment fees
Finally, it's important to pick your investments very carefully if you hope to have a million dollars or more in retirement. Specifically, you'll want to avoid paying large fees. When you have a big brokerage account balance and you invest a lot over time, fees can add up quickly and cost you tens of thousands of dollars.
Look for investments with low expense ratios and avoid working with any financial or investment advisors who charge you a percentage of your portfolio's value. Millionaires don't waste money on unnecessary fees, and you shouldn't, either, if you want to become one.
By taking these three steps, you can put yourself on the path to a retirement where you truly get to live the millionaire lifestyle. It will take diligent saving and smart investing choices, but you can make it happen.
