If the thought of having enough money to actually retire keeps you up at night or gives you pause, you are not alone. A recent survey by BankRate found that 45% of American workers don’t think they’ll be able to save enough to reach at least $1 million in retirement savings. Further, 56% think they are behind where they should be on the road to retirement.
If your goal is to retire with $1 million, it is achievable, but it takes some long-term planning. Here are three simple strategies to hit that million-dollar mark and retire comfortably.
1. Start early; time is on your side
The single biggest factor in reaching your retirement goal is time. The reason time in the market is so important is compounding. Compounding is the simple concept of your earnings generating more earnings, and it is a powerful force.
Consider the numbers. If you are 25 years old and contribute $100 per month to your investments, and you earn an average of 10% per year, you’d have $1 million by age 65. If you are 30 and have a 35-year window, you’d only have $620,000 with the same inputs.
That’s an almost $400,000 difference in just five years. The declines are starker as the windows get shorter. If you are 35 and have a 30-year window, you’d have about $380,000 and if you are 45 and have a 20-year window, you’d have about $140,000 saved by age 65.
This illustrates the impact of compounding, so the earlier you start, the better. Even if you are 45 and have little saved, it may seem impossible, but it may not be if you start now.
2. Get the full company match or more
If you haven’t started investing already, the best place to start is in your employer’s 401(k) plan. The reason these are so essential is that they provide a company match, which amounts to free money up to a certain percentage. Most companies have a 4% company match, but some might have 2% or 3% or have a 50% match up to a certain percentage. Whatever it is, take full advantage of it.
Let’s look at the difference between contributing 2% and 4% of your salary to your 401(k) at a company that offers a 4% match. If you are 35 years old, make $50,000 per year, get a 3% annual raise, earn 8% per year on your investments, and contribute 4% to your 401(k), you’d have about $635,000 by the time you retire at age 65. About $95,000 of that would come from your employer through the match. If you only contributed 2%, you would have about $317,000 after 30 years, and only $45,000 from your employer.
If you are older and need to play catch-up, it would behoove you to increase your contributions, say to 10%, even if you are only getting a 4% match. You may also want to invest more aggressively in an effort to boost your long-term returns. If you are 45 and making $65,000 a year (assuming a 3% annual raise), and contribute 10% to your plan and earn a 10% average return, you’d have about $540,000 at age 65.
Contributing 10% would certainly take a bigger chunk out of your paycheck: about $250 per paycheck if you get paid biweekly, assuming the $65,000 annual salary. However, it helps to have the mindset that you are actually paying yourself, and it is non-negotiable, just as paying your other bills aren’t. If times are tight and there are other more pressing priorities in the present, it might help to create a budget to see where you can save $100 per week or so to afford to pay yourself.
3. Supplement your savings with an ETF
As discussed, if you start investing early enough, you should not have a major problem reaching that $1 million plateau, as long as you are committed to it. If you start later or are behind, the first thing to do is start now, and the primary vehicle should be your company plan. However, your secondary vehicle should be an investment portfolio outside of your retirement plan.
If building a portfolio of stocks that generates solid returns sounds too daunting, simply invest in a single, broad exchange-traded fund (ETF). One that tracks the S&P 500 will give you access to all of the stocks in the S&P 500 in one fund, and that benchmark has returned 10% per year on average over the past 10 years and 7.6% per year over the past 20 years.
An ETF that tracks the Nasdaq 100 will give you access to all of the stocks in that index. The Nasdaq 100 has averaged a 17% annual return over the past 10 years and 13% over the past 20 years.
A $5,000 initial investment in an S&P 500 ETF would grow to about $105,000 after 20 years and almost $300,000 after 30 years, assuming a $25-per-week investment and a 10% annual return.
The combination of this supplemental ETF investment, your 401(k), and Social Security should be able to get you up around that $1-million mark by retirement age.
