You often hear that you need a lofty amount of money for retirement so that you don’t outlive your assets — like $1 million dollars. But that is a big number, and saving for it might seem hard.
With proper planning and enough time, however, this goal is within your reach. Here are three ways you can clinch the title of millionaire by the time you retire.
1. Save $7,000 a year for 30 years
If you were only counting on your contributions annually to get you to $1 million bucks, you’d be responsible for saving $33,333 each year. For most people, this would probably be difficult, if not impossible. But if you invest your money, you can reduce this number dramatically and make such a goal more attainable.
If you earn 9% on average on your investments, you could get to $1 million dollars in 30 years by saving only $7,000 each year! If you can save more than this, you can reach this goal in even less time. For instance, saving $8,000 each year will get you to more than $1 million dollars in 29 years.
2. Earn at least 9%
Investing the money that you save can help you become a millionaire with fewer contributions. But how do you earn this return every year? If you invested in large-cap stocks over the last 20 years, you would’ve had an average rate of return of 9.06%.
However, risk tolerance is important when investing, and if you don’t think your nerves can handle the dips and dives of such an aggressive portfolio, you can consider a different asset allocation model. Over that same period of time, investing in a portfolio of U.S. investment-grade bonds would’ve earned you 4.88% on average, and blending 40% bonds with 60% stocks would’ve yielded you 7.4% on average every year. Because you would’ve earned a lower rate of return, though, you would need higher contributions of $9,500 every year instead of $7,000 if you wanted to reach $1 million in 30 years.
It’s also possible that your portfolio will change over time, which means your contributions should too. While some people are completely OK owning an aggressive portfolio even after they’ve stopped working, you may prefer making your accounts less risky as you near retirement. This will help you avoid major losses when you could be withdrawing from your accounts soon. If you are someone who anticipates reducing your stock exposure as you get closer to retirement, you’ll also need a higher contribution to compensate for the lower return. Using a simple savings calculator can help you figure out just how much.
3. Monitor your assets
If you buy individual stocks, you should research your holdings before purchasing them and as long as you own them. This will help ensure that your opinion about them hasn’t changed and that they’re still meeting your expectations. If you buy mutual funds, they should be monitored so that a certain sector or industry doesn’t grow disproportionately and become a concentrated position in your portfolio. This could lead to excessive losses if that particular segment suffers major losses, like in 2000, 2001, and 2002, when technology stocks were hit particularly hard.
Even if you invest in index funds or ETFs, if you own any other asset classes, at a minimum you should be rebalancing your portfolio back to its initial allocations each year. In a year like 2008 when large-cap stocks underperformed and bonds did well, your portfolio would’ve become more conservative than you’d planned. For example, if you owned 60% large-cap stocks and 40% bonds in 2008, by the beginning of 2009 your allocations would’ve shifted to 47.3% stocks and 52.7% bonds.
If you didn’t correct these allocations, you would’ve experienced sub-par returns when the stock market recovered. Specifically, when the stock market rebounded in 2019, the 47.3%/52.7% allocation would only have had a rate of return of 15.6%, whereas the original 60%/40% allocation would’ve earned 18.3%.
Perhaps the most important trait you can have if you plan to become a millionaire by the time you retire is consistency. These projections are made under the assumption that you will do the same thing every year. Missing a year of saving or saving less than you’d planned can mean making your mark will take longer. Timing the market and selling out of your investments during a bear market can cost you big in terms of dollars and returns. There may be times when you can’t help it and will deviate from your plan. But if and when this happens, it’s important that you recalculate your projections to see how this change has altered them and use this knowledge to get back on the right track.
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