If you want to retire with $1 million or more, you need a good plan to get there.
The more time you have, the better your chances of reaching that $1 million milestone. But even if you're late to the game, you can still save up that big seven-figure nest egg you might need to retire comfortably. Following a simple blueprint can put you on a path toward that million-dollar retirement goal. Here's one to get you started.
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1. Figure out how much you need to save every year
Consistently saving and investing every year is key to retiring with $1 million. Above all else, saving your money is the most important factor. What accounts you use and how you invest your money are important, too, but you won't get very far if you don't have any money saved.
The sooner you start saving and investing, the less you have to save each year. You will have more years not only to save but also for compounding to work its magic on those savings.
The S&P 500 has produced a total return of 6.5% per year adjusted for inflation. Using bonds as a ballast in your portfolio will cut into those returns but smooth the ride considerably. So here's how much you'd have to save each month, assuming a 6% annual return from your retirement portfolio based on how long you have until you want to retire.
| Years to Retirement | Monthly Savings Goal |
|---|---|
| 40 | $524 |
| 35 | $728 |
| 30 | $1,026 |
| 25 | $1,479 |
| 20 | $2,205 |
| 15 | $3,485 |
| 10 | $6,155 |
Table source: Author.
Saving that much does not guarantee you'll reach $1 million by retirement. In fact, since we're talking about average returns, you'll often end up with less than $1 million, and there's also a strong likelihood you'll end up with more than $1 million. But it's a good goal to shoot for each month to put you on the path.
2. Get your 401(k) match
Those savings goal numbers might seem like a lot, especially if you're getting started late. The good news is your employer might help you out.
If your employer offers a 401(k) matching contribution, it's one of the best ways to boost your retirement savings. If you're bringing in $80,000 and your employer offers a 3% match, that's an extra $200 per month toward your retirement savings by maxing out that match.
Contributing to your employer-sponsored retirement plan up to the match should be your first step toward your million-dollar retirement.
3. Make the most of other tax-deferred accounts
Using tax-advantaged retirement accounts can help you save more for retirement by giving you additional tax savings up front. Those tax savings can be a huge boost.
For example, if you're solidly in the 22% tax bracket, every dollar you contribute to an IRA saves you $0.22 on your federal taxes. It's also deductible on your state tax return, producing extra savings. So if you plan to contribute $5,000 to an IRA, you'll have an additional $1,100 you can contribute if you also invest the tax savings.
Common tax-deferred retirement accounts include an IRA, a 401(k), and a health savings account (HSA).
If you have a relatively low income or a high amount of deductions or credits, you might not save very much by contributing to traditional retirement accounts. A Roth account may provide better benefits, locking in an extremely low tax rate now so that you don't have to pay taxes on the distribution in retirement.
4. Invest in an age-appropriate portfolio
Once you've funded your retirement savings accounts, it's time to invest your money.
If you simply save your money, it will lose value over time due to inflation. The simplest way to outpace inflation over time is to invest in the financial markets. But each individual will have different requirements for their portfolio based on how soon they expect to retire.
A person with 10 years to retirement is likely more focused on capital preservation, while someone with 40 years until retirement should be looking to grow their investments aggressively.
A person in their 20s may do well with all their money in a simple S&P 500 or total stock market index fund. As the person nears retirement, shifting more money into an index fund tracking the U.S. bond market, or simply treasury bonds, would be smart.
Many experts recommend a 60/40 portfolio of stocks to bonds by the time a person reaches retirement. You can move toward that asset allocation quickly if you're still trying to grow your account aggressively, or you can move more slowly if you earn great returns off the bat and are looking to preserve capital more than grow your savings. The shift in asset allocation over time is called a glide path.
5. Save and rebalance every year
Once you've decided on a target asset allocation and glide path, the only thing left to do is stick to the plan.
When you contribute to your retirement savings, it's best to use it to rebalance your portfolio toward your target allocation. If your stocks have run up quickly and bonds have fallen in price, you may find the entirety of your savings going toward buying bonds for a few months until your asset allocation is back in balance.
As your account grows, however, your monthly contributions won't be enough to balance your portfolio fully. It's recommended you rebalance once a year by selling winners and buying your losers with the proceeds. This may have tax consequences if some of your savings are in a taxable account, so be sure to plan accordingly.
$1 million retirement
If you follow the steps above, you'll be well on your way to a $1 million retirement. Remember, though, it's simply a blueprint. The actual results will vary from person to person, and you'll have to adjust to get to retirement with the money you want. You may end up having to save more, shift your asset allocation differently from originally planned, or work longer before retiring. Market forces may also work in your favor, allowing you to take your foot off the gas pedal or retire early. What's most important, though, is consistently following a plan.
