If you're earning an average salary, it may be harder to devote cash toward your retirement fund -- especially as costs continue to soar and many workers are finding it challenging just to make ends meet.
While it's not easy to build a nest egg worth $1 million, time and consistency can help you get there. Here's how.
Image source: Getty Images.
How to retire a millionaire
According to the most recent data from the U.S. Bureau of Labor Statistics, the median weekly income among American workers is $1,159, amounting to just over $60,000 per year.
A general rule of thumb among financial professionals is to devote 10% to 15% of your pre-tax income to retirement savings, which would be $6,000 to $9,000 per year for the typical worker. Given many households' financial strain right now, however, those figures may be unrealistic.
Let's say instead that you're able to comfortably set aside 5% of your income for retirement. If you're earning $60,000 per year, that would amount to $3,000 per year, or $250 per month.
The stock market itself has earned an average rate of return of around 10% per year over the last 50 years. At that rate, here's approximately how $250 per month could add up over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $172,000 |
| 25 | $295,000 |
| 30 | $493,000 |
| 35 | $813,000 |
| 40 | $1,328,000 |
Data source: Author's calculations via investor.gov.
In this case, it would take between 35 and 40 years of consistent investing to reach the $1 million mark. If you can afford to contribute more per month, you could reach that goal faster. Contributing 15% of your income -- or $750 per month in this scenario -- could help you reach $1 million in about 27 years, all other factors remaining the same.
One simple way to supercharge your savings
The rate of return you're earning on your investment is one of the key factors determining how much you accumulate over time. Earning even slightly higher-than-average returns can have a massive impact on your savings.
For example, say that instead of earning a 10% average annual return, you're earning a 12% average yearly return -- only slightly higher than the market's long-term average. If you're still investing $250 per month, here's how it could affect your savings over time:
| Number of Years | Total Portfolio Value: 10% Avg. Annual Return | Total Portfolio Value: 12% Avg. Annual Return |
|---|---|---|
| 20 | $172,000 | $216,000 |
| 25 | $295,000 | $400,000 |
| 30 | $493,000 | $724,000 |
| 35 | $813,000 | $1,295,000 |
| 40 | $1,328,000 | $2,301,000 |
Data source: Author's calculations via investor.gov.
So how do you go about earning higher-than-average returns? It comes down to your investment choices.
Contributing to a broad-market fund like an S&P 500 ETF can be a safer and more stable option, but it often results in slightly lower long-term returns. While this doesn't mean it's wise to take on unnecessary risk, contributing to a growth ETF or a hand-selected group of individual stocks could help you earn more over time.
Balancing risk and reward is crucial when investing for the future, and the right investments can transform your retirement fund. With time, consistency, and a robust portfolio, you could earn more than you might think.
