One out of every six people in America today gets to retire a millionaire! That sounds fairly optimistic since most of us at some point in our lives dream of becoming one of them. One out of every six retired Americans is now retiring as one and that is from a documented report by online investing company United Income which analyzed data from multiple sources including the Federal Reserve Board and the U.S. Bureau of Labor Statistics. The purpose of the study was to find out how retirees are faring now compared to previous generations and compare the results.
One way I suppose to become a millionaire is to buy lots of scratch off tickets in your state lottery or to try to get on a quiz show like “Who Wants To Be a Millionaire” but let’s be somewhat realistic here. There are other ways, aren’t there?
So What Do You Need to Do to Retire a Millionaire?
One sure path to getting to the vaunted millionaire status in life is by saving your money and starting that at a very young age. But, one of the most common financial mistakes people constantly make is not saving any money at all or not saving enough money until way too close to retirement. One huge conclusion from the United Income study (and really a very basic common sense conclusion) is this: “increasing your savings rate is the single biggest thing you can do to increase the size of your nest egg in retirement”.
If you’re very fortunate, your parents may have started a savings account of some kind for you when you were first born or as a small child. You might even have done it yourself when you were in elementary school or when you had your first job as a teenager. By the time you actually reach adulthood and get your first real job, opening up some kind of savings or retirement fund account is a must and the sooner you do it, the better. Long-term savings and compound interest rates are your very best friends and a sure-fire way to get aimed towards financial security and becoming a millionaire!
The “How to Get There” Story
One of the most common financial mistakes people make is not saving any money or just not saving enough. Since increasing your savings rate is “the single biggest thing you can do to increase the size of your nest egg in retirement” then what would be a good reason not to save, even if you start small and aim big?
Many factors can determine how much you should be saving, but it should be a significant amount if you expect to retire comfortably. The best savings rates vary depending on your income, expected returns, retirement date, desired lifestyle in retirement, and the “where” you save your money, but most people need to save 10-20% of their income regularly to insure a comfortable retirement planning base. That’s not always easy for people to do.
So Just Save? What About Investing?
Investing obviously can have a huge impact on your future retirement funds and can be a major source of income in your retirement, too. That second part is very important and here’s why.
You can save a lot in an account for a long, long time and when you get to retirement you will have a tidy sum on hand. But at the same time, inflation will have crept up on you and your money so that you just might be spending money earned 25-40 years ago that has lost some of its real value. More than just likely it definitely will. Even at just a 2% annual inflation rate, over a 25-year period you can expect the prices of things will have risen about 50% on average!
That means a rental payment today of $1,000 a month may be $1,500 a month when you retire in 25 years! That’s why investing is a perfect add-on to your savings plan. While becoming a millionaire seems like a worthy retirement goal, that money is only likely to produce a modest retirement income when spread over several decades of retirement in a future that’s in the distance of say 25 years from now.
Investment Risk and Fees
Finding the right investment mix is a crucial balance with savings when it has the right amount of risk for you and some promise of good returns. Your risk tolerance is the key here and is the way that investments are gauged for you to consider. Higher risk means the potential for higher reward and vice versa. If you still want to get to a millionaire status, having a stream of investment income will help you make that million actually be able to be what you need in retirement! Yes, it does involve a higher risk.
Your investments will grow faster if you minimize any fees on your investments. If you save for 40 years between ages 25 and 65, and add just 1% annual fee, you will need to save about $6,200 per year to reach $1 million by retirement, instead of $4,800 per year without the extra 1% fee. That’s over $100 extra per month for 40 years!
Experts recommend your investment portfolio be weighted more in stocks than bonds. That’s because stocks have more risk, but by looking at the entire asset allocation strategy and not just a single stock account, you can use stocks to earn higher returns for your overall retirement fund.
Don’t try and think you can beat the market when investing. The market can be a major part of a robust retirement plan, but actively trying to outperform the market can spell trouble. Studies show that from 2012-2017, for example, 84% of professional money managers didn’t outperform the indices, so what makes you think you know better? Index funds are a good way to grow your finances in the market without the headache and higher risk of actively trading.
Why (Beside the Obvious) Do You Need Emergency Funds?
One of the most common pieces of financial advice for people of any age or goal is to create an emergency fund. Yes, it is your financial safety net in life when the unexpected happens and you need a financial band-aid right away. Don’t let retirement account penalties reduce your retirement savings. There’s a 10% early withdrawal penalty if you take money out of a traditional IRA before age 59½ (with only a few exceptions).
But here’s a consideration that most of us really never think about. That is that to retire a millionaire you still need to have built enough of an emergency fund to sustain you when and if you have a car breakdown, illness, or other need for cash without having any kind of need for early withdrawals from a 401(k) or IRA which leads to tax penalties and endangers your future.
Drawing money early from your retirement plan is NOT ever a good idea and it’s not your emergency fund back-up plan!
Always Take Advantage of Tax-Advantaged Accounts
Prudent investors should take advantage of tax savings by using the right kind of accounts. If you think your income will be higher in retirement than it is right now, you should contribute to a Roth IRA/401(k), which allows you to pay taxes up front and withdraw the money tax-free later on in retirement.
If you think your income will be lower in retirement, (which it often is when you stop earning a regular paycheck) then you should contribute to a traditional IRA/401(k), in which you don’t pay taxes on contributions, but instead pay them on your withdrawals in retirement.
Retirement accounts like a 401(k) can be a very important part of your plan to retire as a millionaire. That’s why I and almost everyone else agree that walking away from something like a matching company program that will match your contributions up to a certain point is a huge mistake!* It’s free money from your employer and if you aren’t maximizing it for any reason, you’re not going to get where you want to be!
*One footnote here and something to watch for when changing jobs is that you need to be careful when you do, that you get to keep the match. Many companies have vesting schedules that prohibit departing employees from taking the match with them until they work for the firm for a specific number of years or they limit workers to keeping just a portion of the match based on their years of service. Find out about that before you make a decision to change your employer.
It always pays to contribute up to the full match in an employee match program!
Budgeting Helps You Find More Money for Retirement
Making regular automatic paycheck withdrawals to fund your retirement will turn saving into an easy job. Deciding the when and how much to save each month has been shown however to be a major deterrent to saving at all.
Stressing the importance of a budget and how it obviously helps you live within your means seems like a no-brainer. It does track and helps control your monthly expenses. But it also has an impact on your retirement planning ability, too!
Budgeting is a super effective way to identify and reduce unnecessary spending, and use those savings by looking at retirement from a “10,000-foot view” rather than a street-level view of a weekly paycheck or monthly budget report. Budgeting will help you retire as a millionaire because you’ll find money you didn’t know you even had and your future retirement account balance will thank you later. Like in 25-40 years from now!
Who wants to be a millionaire? That answer is pretty clear, but it just may be that wanting it is fast becoming a needing to be!
Of course, everything about your retirement is based not only on your nest egg, but also on your lifestyle choices. Do you want to maintain your lifestyle that you currently have? Live an even more active one that includes travel, dining out, and other social niceties that you will have more time to enjoy in retirement? Or, will you downsize and live a quieter and less costly life in retirement? Those decisions will determine the “how much” you need and what you need to do to get there. One thing that I can almost project with certainty is this: Retiring as a millionaire will be the rule and not the exception 40 years from now!
What are you doing about your retirement plan now? Have you saved regularly? Do you have an employee matching plan at work? Have you invested for your retirement? Do you think you will be a millionaire when you finally retire?