Do you want to retire with $1 million? It's a good goal to
aim for. Though there's no guarantee that a $1 million nest egg will completely
eliminate your financial stress later in life, it's certainly a comfortable –
and comforting – savings balance to go into retirement with. And while that $1
million target may seem lofty, here's some good news: You can actually get
there by saving just $300 a month.
Seem too good to be true? It's not. But there are some
caveats. To retire a millionaire by contributing just $300 to your retirement
savings plan, you'll need to follow these two rules.
1. Start early
Many people get their first job in their early 20s, only
they don't start funding a retirement plan until many years after. That's a
mistake, as losing out on those early years of contributions and investment
growth could spell the difference between retiring a millionaire and falling
short.
Imagine you sock away $300 a month in an IRA or 401(k)
starting at age 22, all the way until age 67, which is full retirement age for
Social Security purposes for anyone born in 1960 or later. If you give yourself
that 45-year savings window, you could wind up with just over $1 million to
your name if your IRA or 401(k) investments generate an average annual 7%
return (which we'll discuss in just a minute).
But if you wait even five years to start saving that $300 a
month, you'll end up with roughly $719,000, instead. To be clear, that's still
a respectable amount of savings to kick off retirement with. But let's face it
– it's not $1 million.
2. Invest aggressively
The money in your IRA or 401(k) shouldn't just sit there in
cash. Rather, you'll need to invest it so it grows into a much larger sum.
While bonds are a lot less volatile than stocks, they also tend to offer
substantially lower returns, which is why it pays to get aggressive with your
retirement plan investments. The stock market has historically delivered an
average annual 9% return. If we assume that most but not all of your IRA or
401(k) investments get to sit in stocks during your savings window, then it's
fair to apply a 7% average annual return like we did above.
But watch what happens when you play it too safe in your
retirement plan. If you sock away $300 a month for 45 years but only invest
half of your wealth in stocks, leaving the other half in bonds, you might
average more like a 5% yearly return, instead. And in that case, you'd be
looking at retiring with $575,000, not $1 million
Again, $575,000 is nothing to scoff at. But it's also a far
cry from $1 million, especially considering that you'll be contributing the
same amount of money throughout your career, only to end up with $425,000 less.
Retiring a millionaire is easier than you think
Closing out your career with $1 million to your name doesn't
have to mean parting with a third of your paycheck and living an uncomfortably
frugal lifestyle throughout. All it takes to retire a millionaire is saving
consistently from a young age and investing your money wisely.
By following the two above rules, you may be pleasantly
surprised at how much wealth you wind up with by the time your senior years kick
off.
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