How to All but Clinch a Millionaire Retirement | Smart Change: Personal Finance

(Stefon Walters)

Reaching the coveted millionaire status is a goal for many people. After all, being able to call yourself a millionaire has a nice ring to it. Reaching that level won’t come overnight, but it’s definitely feasible with enough consistency, discipline, and time on your side.

With the various retirement accounts and resources available, you can be well on your way to millionaire land. Here’s how to all but clinch a millionaire retirement.

Let compounding do the heavy lifting

Getting to $1 million by anyone saving is a tough ask of anyone. Even if you had 25 years to do it, you’d need to be able to put up $40,000 annually to get there. For most people, this isn’t feasible. That’s why investing and letting compounding do the work for you is important.

Image source: Getty Images.

If you had those same 25 years, here’s how much you would have accumulated at different monthly contributions, assuming you receive a 10% return annually over the long run.

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Monthly Contribution Total Contributions in 25 Years Account Total in 25 Years
$1,000 $300,000 $1.18 million
$1,500 $450,000 $1.77 million
$2,000 $600,000 $2.36 million

Data source: Author calculations.

In the three above scenarios, you wouldn’t come close to having personally contributed $1 million. Yet in each case, you end up with a total well over that. That’s because compounding did the heavy lifting for you, as reinvested returns generated additional earnings of their own. What’s important is that you make consistent investments — preferably using dollar-cost averaging — and give yourself a chance to reap the benefits of time.

You don’t need a home-run investment to get to that point, either. An index fund like the S&P 500 has proven that it can be a one-stop shop for investors looking for a low-cost investment that provides sizable returns long term. Even the most experienced professional money managers have a hard time outperforming the S&P 500 in the long run.

Use other people’s money

A 401(k) plan is the most popular type of retirement account, and given its benefits, it’s easy to see why. There’s no way to guarantee a return on your investment in the stock market, but one way you can guarantee a return is by taking your employer match.

Generally, an employer will match up to a certain percentage of your 401(k) contributions. Whatever the amount that your employer matches should be the bare minimum amount you contribute.

A 401(k) match is as close to “free” money as you’ll likely witness in your adult life, so take advantage of it. If you make $100,000 and your employer matches 5%, that’s an extra $5,000 annually. If it continues for 20 years, that’s $100,000 extra you’ve earned without doing any extra work. You can’t beat that.

You’ll be glad you reached millionaire land

Part of the reason $1 million is such a benchmark is that you’ll likely need it to live comfortably in retirement. Retiring a millionaire is shifting from a luxury to a necessity for many people.

There are two baselines to use when deciding how much you’ll need in retirement. First is the 80% rulewhich states you should aim to have 80% of your preretirement annual income in retirement to maintain your current lifestyle.

Once you have that total, you can apply the 4% rulewhich says you should plan to withdraw 4% of your retirement savings annually (accounting for inflation) without worrying about outliving your savings.

Using these rules of thumb, if you currently make $100,000, you’ll need $80,000 in retirement. To find the ideal savings amount, multiply $80,000 by 25, totaling $2 million.

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