The median retirement savings balance among Americans aged 65 to 74 is $200,000, according to the Federal Reserve. But what if you’re not happy with $200,000 or $609,000 in retirement savings? What if your goal is to get to $1 million by the time your career wraps up?
You might think that’s an impossible feat — especially if you only earn an average salary. But saving $1 million for retirement may be more doable than expected.
You have to start early
If your goal is to retire with a giant IRA or 401(k), then starting early is key. And that doesn’t mean you should start saving for retirement at 35, or 32, or 30. The best time to start is in your early 20s, which is when many people start working full-time, because that will give your savings the maximum amount of time to grow.
If you’re wondering how you’re going to find the money for a retirement plan when you’re earning an entry-level salary, realize that you don’t have to start off with big monthly contributions. Start with $50 if that’s all you can swing, or $100 if it’s manageable. Small contributions will go a long way over time if you have a lengthy savings window and invest your money in assets that lead to a lot of growth.
Invest in stocks — but do it the easy way if that’s what works for you
A long retirement savings window could work to your advantage. But if you’re aiming for $1 million, be prepared to invest your money in stocks. Although doing so means taking on some risks, when you’re saving over a decades-long period, you have ample opportunity to ride out market downturns and come out ahead.
The stock market has rewarded investors with an average annual return of 10% over the past 50 years. This doesn’t mean that every year over the past 50 was a great one, though. There were plenty of stock market crashes that investors who stayed in the game ultimately recovered from. If you start investing for retirement in your 20s and keep doing it through your 60s, you could have the same experience.
The path to $1 million
Let’s run some numbers to see how it’s possible to get to $1 million in savings. We’ll assume you can only part with $120 a month throughout your entire savings window — because you may not have much earnings in your 20s, and later on, you might have larger expenses, like children and a mortgage.
If you invest that sum at a 10% return over 45 years, you should end up with a bit more than $1 million by your late 60s (assuming you start in your early 20s). Make it $200 a month, and you’re looking at over $1.7 million.
Of course, the wild card is choosing the right stocks. That’s something you may not be comfortable with.
The good news is that you don’t have to take on the stress of choosing stocks individually. Just put your IRA or 401(k) into some S&P 500 index funds. These aim to match the performance of the broad market, and they’re an easy way to manage the risks associated with a stock portfolio.
It’s possible to end up with $1 million in retirement savings if you give yourself plenty of time to build a nest egg and rely on stocks for strong returns. This isn’t to say that you’re doomed if you get a later start or choose to invest more conservatively. But in that case, you may not have as easy a path to $1 million — if you’re able to get there at all.
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