Who doesn’t want to retire with a million dollars in their bank account? If you don’t want to, I guess you can go look somewhere else, but for those who want one million (preferably more) for retirement, then we are going to show you how to do it. Before you get excited, this is not a get rick quick scheme or some fuzzy math. This is how you will grow your money over time with calculated investments and compound interest.
Related: What is compound interest?
I’ve reached out to my friend Pauline to give you a breakdown of how to retire with a million dollars in your bank account and enjoy life a little more. You might need more or less depending on your retirement, travel, and overall money goals, but let’s just focus on that million mark. Take it away Pauline!
This is a guest post from Pauline of InvestmentZen.com
Retiring a millionaire is something I hear people say often. Most of the time, they are talking about having a million dollars saved up, on top of equity on their main residence. Saving a million for retirement is not an easy task, but it can be accomplished if you are serious about it.
Is a million your retirement number?
First, you should ensure saving a million dollars is not just a number you came up with, and will indeed set you up for a comfortable retirement. Assuming a safe withdrawal rate of 4%, a million will allow you to live on $40,000 yearly without depleting your nest egg. That is quite a nice amount, especially if your mortgage is paid off, and with the average social security check of $1,200, you would be looking at a $4,500 monthly income.
Figure out your retirement withdrawal rate with this awesome calculator.
30 years from now, inflation will erode that figure a bit, but that is still a solid number. If that is not enough for you to live on, then you need to save even more right now, to keep your lifestyle in retirement. Find out how much you will need monthly, and shoot for saving 25 years of expenses.
The importance of returns
Saving a million dollars will be much easier if you use the power of compound interest. If you are currently getting 1% returns on your savings account, saving a million over the next 30 years will require you to save close to $2,500 every month.
On the other hand, if you get 8% annual returns, you will only need to save around $700 a month.
8% is less than what the S&P500 returned over the past 30 years. Not an indication of future returns, but these 30 years have seen a lot of ups and down, and are a pretty long period to get an idea of how the stock market behaves.
So open a brokerage account and start investing. It doesn’t require you to spend hours researching stocks, as a matter of fact even professional fund managers have a hard time beating index funds. Just pick a few and start sending money regularly. Repeat for a few decades and your million will take shape!
Not sure you can start investing without help? Here’s exactly why you can (and should) start investing on your own. It’s the best way to get to that $1 million mark that everyone loves so much!
If you don’t have an investment account, start one now at a few of our favorite places: Betterment, WealthFront, TradeKing, or Vanguard.
Get that free money
You want every help you can get in order to come up with some extra cash. So start by funding your 401k in order to take advantage of your company match if they offer it. That is free money you can’t afford to pass on. On top of the company match, your contributions are pre tax. So if you are in the 25% tax bracket, contributing $1,000 to your 401k will only reflect as a $750 deduction on your paycheck.
Say your company matches that amount, and you have invested $2,000 at a $750 cost to you. Yes, you will eventually be taxed in retirement when you withdraw from your 401k, but by then you will not earn a steady income anymore, so it is likely your tax bracket will be lower than it is now.
The exact math to save a million dollars
Assuming a rate of return of 8% over the next 30 years, if you want to save a million dollars, you need to invest $700 per month. The final figure will be $1,055,755. If you are in the 25% tax bracket, that means investing $525 after tax, every month.
Yes, that is a lot of money, but we haven’t taken into account the company match yet. And that is only $17 a day. You could work an extra hour on the side and make that much. You could invest your tax refund, which on average is $2,800, and have over five months of investing covered. You would just need to come up with half that amount.
Bottom line is there is a way. And like we’ve seen previously, saving a million dollars isn’t exactly planning for an extravagant retirement. $40,000 a year is a teacher’s salary. So you know how to get it, now it is time to get serious about it!
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