11 Steps to Becoming a Retirement Millionaire

Retiring with $1 million to your name would give you around four times the net worth that the median American household has in retirement. As a result, even if a million bucks isn't worth what it used to be, it's still a great target to strive toward. Of course, a million dollars won't just fall into your lap. If you want to reach millionaire status by retirement, you need to build and execute a plan that gets you from where you are to that rarefied status in the working years you have left.

Fortunately, with enough time, a decent income, and a solid plan, you can get there, almost no matter where you're starting from. These 11 steps will help you along your path from where you are to what it takes to become a retirement millionaire.

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Step 1: Learn where your money is going today

To make the changes that will get you from here to that millionaire status, you need to think like a GPS and build the plan that takes you from where you are to where you want to be. Understanding where you are requires knowing where your money is going to help you make the priority calls you'll need to make to get it going where it will do you the most good.

For at least two months, track every penny you're spending. On top of that, figure out a monthly estimate for your occasional but still somewhat predictable expenses like car repairs, holiday spending, and homeowners or renters insurance. While you're tracking, don't make judgment calls on where your money is going. Focus instead on making sure you capture everything. Use a spreadsheet, paper and pencil, financial tracking software -- whatever works best for you is fine.

Step 2: Color-code your costs based on your priorities

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For every expense you tracked, highlight it red, yellow, or green. Use red for the expenses that you don't really care about, money you spent absent-mindedly, or choices you would actively not make again. For key priorities that you can't or won't change -- such as a lease you recently signed -- highlight it green. For everything in between, highlight it yellow.

The red and green highlighted expenses are easy. For the red money, make the active choice to stop spending it. For the green money, it's a priority that you can keep as-is, unless you absolutely can't make ends meet and have a little left over to sock away any other way. For the yellow expenses, you have a bit more work to do.

Step 3: Figure out how to get your "yellow" expenses down to their essence

Your goal with that money you highlighted yellow is to figure out how to reduce your spending until you can convert it to 'green' -- core priorities that you're not willing to sacrifice unless all else fails. For instance, if you discover you're spending around $220 a month eating lunch out every day, can you reduce that to $50 by cutting back to once a week and brown bagging the other days? You can still get away from your desk and eat with your coworkers, but do so at a much lower cost.

In addition to lowering your frequency of spending, you may be able to find other ways to lower your costs. For instance, you could be able to reduce your car insurance by increasing your deductible, giving up coverage you don't really need, or comparison shopping with another provider. Likewise, you may be able to lower your utility costs by using a programmable thermostat, switching to LED lighting, and investing in caulk to help seal up gaps around your windows.

Step 4: Determine if you can get your income up

Can you work extra shifts or overtime at your primary job? Can you pick up a side hustle to earn a few extra bucks? Can you justify asking for a raise by pointing to recent accomplishments or comparing your salary to benchmarks of people in similar jobs? Are you able to shift to a higher-paying job with another employer? Can you rent a spare room in your home? From a one-time boost perspective, can you sell belongings you no longer need?

Your objective with Steps 2 through 4 is to put space between your income and your expenses, while keeping the money that you do spend focused on your priorities. The bigger your income compared with those expenses, the easier and faster you can start building your million-dollar nest egg. If at this point, you're still spending more than you're earning, go back to Step 2, switch some yellows to red and some greens to yellow, and complete steps two through four again.

Step 5: Snowball (nearly) all your debts

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Take all your debts and line them up from highest interest rate to lowest interest rate. On all your debts except the one with the highest interest rate, pay the minimum. On your highest interest rate debt, accelerate the payment above and beyond the minimum by throwing everything you can against it. Use the money you freed up in Steps 2 through 4 to make your payments even more powerful.

Once that debt is paid off, repeat the accelerated payoff on the next highest interest rate debt you have, adding the money you had been paying toward the now retired debt to what you're paying down on it. Repeat the process until (nearly) all your debts are paid off.

There are very few circumstances where it's OK to keep a debt instead of paying it off before you invest. Debt you may be willing to keep should have all the following characteristics:

• The debt has to be at a low interest rate -- low enough that you have a realistic chance of investing at a higher rate of return after costs, taxes, and volatility than the debt costs you.
• The debt has to have a low payment -- low enough that your total spent on debt service still leaves you plenty of breathing room for your other priorities and investments.
• The debt has to serve a clear purpose for your future -- such as to provide you shelter, a means of assuring you're able to work, or to pay for lifesaving medical treatment.

If you can meet all three of those characteristics with one or more of your debts, you can consider continuing to just pay the minimums rather than including it in your snowball.

Step 6: Save up $1,000 for the inevitable "stuff happens" moments

Nearly 70% of Americans have less than $1,000 in cash available to them in savings. That kind of situation can put you one slip-and-fall accident, fender bender, or even moderate illness away from slipping back into debt. Prove to yourself that you can save money, protect yourself from those inevitable "stuff happens" moments, and set yourself up for ultimate success by saving just that little bit. When you hit that first minor road bump along the way, you'll be glad you did.

Step 7: Take advantage of any free money your boss is offering you

If your 401(k) or other employer sponsored retirement plan offers you a match, now is a great time to start saving in that plan as much as it takes to maximize the match you get from it. An investment to get an employer match generally offers you the highest rate of return most people are probably able to get anywhere. That makes it usually worth the risk of starting to invest up to that point before you build up your full emergency fund.

Of course, if you're at particular risk of a job loss or have other reason to believe your income is at higher risk or that your costs could spike, you might want to delay this until after Step 8.

Step 8: Build up an emergency fund of three to six months of your expenses

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A full emergency fund won't do much toward helping you build your million dollar nest egg, but it can help you keep the rest of your progress if something happens along the way. Don't despair, however. By the time you get to this step, your expenses should be fairly low, since you've cut out all the fat in Steps 2 through 4 and eliminated (nearly) all your debts in Step 5. That minimizes the amount you need to save in this step and speeds up your ability to get there, versus how long it would have taken before.

There are two key reasons you need an emergency fund instead of just relying on the investment nest egg you started building in Step 7. The first is that to have a chance of getting the stock market's long-run rate of return, you have to put up with its volatility. The market doesn't always go up. If you face an emergency at the same time the market is down (such as if you lose your job during a recession), selling your stocks while they're down could force you to take an even bigger step backwards.

The second is that to get that free money your boss is offering, you probably have to invest inside a qualified retirement account. To tap that money before a traditional retirement age, you usually have to pay income taxes and a penalty, and thus would automatically lose a bunch of the money you thought you had.

By having an emergency fund, you can better protect your nest egg by having ready cash available to spend if an emergency strikes, no matter what the market is doing. It's an asset allocation move that you hope you never need to take advantage of but that you'll be thrilled to have available to you if you do.

Step 9: Sock away as much as you can within qualified retirement plans

Once you've got your emergency fund in place, you can really begin focusing on building that million dollar retirement nest egg. When you're saving for retirement, qualified retirement accounts like IRAs and 401(k)s are great tools to help you build your wealth. They offer tax-deferred compounding and often either tax-free withdrawals in retirement (Roth style accounts) or a potential tax deduction at the time you make your contribution (traditional style accounts).

If you're under 50, you may be able to contribute as much as $19,500 per year to your 401(k) at work, and if you're age 50 or up, that amount increases to $26,000.  If you have earned income, you may be able to contribute up to $6,000 per year in your IRA if you're under age 50 or $7,000 per year if you're age 70 or up. If you're married and both spouses work, you can each contribute to both types of accounts. If only one spouse works, you can contribute to an IRA for the non-working spouse. 

If you can't afford to contribute the maximum allowed to your accounts, whatever you sock away can still get you closer to your goal. The following table shows how many years it takes to get to $1 million based on the amount you can sock away each month and the rate of return you earn along the way.

Calculations by author.

The top row in that table represents a single person under age 50 contributing the maximum to both a 401(k) and an IRA. Notice, however, that even socking away the smaller amounts can potentially get you to millionaire status within a typical working career span. You'll need to start early, save consistently, and earn a decent rate of return along the way, but it is in the realm of feasible.

Step 10: Invest the money you're socking away for the long haul in stock type investments

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Over the long haul, the broad US stock market has provided compounded returns near the 10% annualized level seen in the table in Step 9. The challenges, however, are that those returns aren't guaranteed and that stocks don't always rise. Indeed, some years, they can fall quite a bit. As a result, you'll want to keep money you need to spend within the next five or so years out of stocks and in less volatile investments like short-term investment grade bonds or cash.

The trade-off with those lower-volatility, higher-certainty assets is that they also bring with them a lower expected rate of return. As that table in Step 9 shows, that translates to either having to save more money each month or save for a longer period of time to get to the same $1 million mark.

Still, for money you won't need to spend for several years, stocks represent a reasonable long-term investment, given their higher potential long term returns. Unless you're into the research and understand the additional risks that come from investing in individual stocks, the easiest way to invest in stock type investments is to buy a broad market index fund.

Setting up your investments to automatically buy a broad market index fund with every paycheck or deposit into your account is an incredibly straightforward way to earn stock-like returns on your money. It may not seem all that exciting, but it does tend to beat the vast majority of professional money managers year after year. If your overall objective is to become a retirement millionaire, that makes it a great approach to consider.

Step 11: Keep it up

If you look back to the table in Step 9, the shortest time frame there estimated that it would take 16 years of consistently maxing out your 401(k) and IRA and earning 10% returns to become a millionaire. Sock away less each month, earn a lower rate of return, or stop investing earlier, and it will take longer for you to reach that target.

The good news on this front is that once you get in the habit of saving and investing your money, you'll soon realize you don't miss the cash that you're socking away. That's particularly true for your 401(k) or other employer-sponsored plan where you can have the money automatically deducted from your paycheck and invested without any further action on your part.

In addition, if you look at the bottom row of that table in Step 9, you'll notice that it's based on investing $250 per month. That works out to a bit less than $10 per day. Even if you're just starting out and in a fairly low wage career field, that $10 per day might very well be within your reach. It will take a long time to reach millionaire status if you stay at that savings rate throughout your career, but it's achievable. Remember, too, that as your salary increases, you can boost your savings rate.

The biggest secret of all is that there is no secret

Once you reach millionaire status, you'll be glad you did -- and you'll be amazed at just how straightforward the process was. It doesn't take an incredibly complicated plan, superior financial know-how, or any sort of magical formula to get there. These 11 steps will enable you to get from $0 -- or maybe even a bit below $0 -- to $1 million within the span of a typical working career.

Of course, just because it's straightforward doesn't mean it's easy. Life happens, and things don't always fall according to plan. That's why more than half the steps in this list have to do with getting everyday spending under control and building up an emergency fund rather than investing. Indeed, the investing is in many ways the easiest part of your journey once you have a solid financial foundation in place. So get started now, and improve your chances of reaching millionaire status by retirement.