When it comes to retirement, perhaps the single biggest question is “how much do you need to save?” And the honest answer depends entirely on how you want to live, what responsibilities you have and where you want to be. Many financial advisors recommend $1 million as a good rule of thumb. And with this amount in principal, you can draw down a comfortable annual income. For workers ages 45 to 50, it’s not too late to build up a meaningful nest egg. Here are some tips for hitting that $1 million mark in 20 years with a lot of hard work.
A financial advisor can help you create a financial plan for your retirement needs and goals.
Retire Later If Possible
Most experts no longer consider 65 the age of retirement. Based on Social Security, the federal government now treats 67 as the full age of retirement. Many other experts, from financial advisors to academics, go further and suggest that most Americans should consider 70 the new age for retirement.
This is doubly true for young people. Between multiple recessions, wage stagnation and student debt, workers born after 1980 have little to show in retirement savings. Many will have to work longer to make up for that lost time.
In all of this is at least one good perspective. Retiring later gives you more time to earn and save money. In particular, it’s a much better strategy than planning to return to work if necessary. You’re better off working until 70 than trying to return to work at 80.
Target a Rate of Return
Whenever you have a financial goal, the first question is to choose a rate of return you want to target. The idea here isn’t that you can select your rate of return, obviously not. Rather this is about risk and reward planning.
With a more aggressive portfolio that targets a higher rate of return, you can contribute less on a regular basis. But you also need the flexibility to make up for losses at need. This is a good strategy if you want to dedicate less of your take home income to this retirement account, but can also make large catch-up contributions at need.
If you build a less aggressive portfolio that targets a lower rate of return, you will need to contribute more to the portfolio on a regular basis to reach your goals. But you don’t need to plan for as much risk, so you don’t need as much financial flexibility to make up for losses.
A good rule of thumb is to target 10%. Historically, this has been the average rate of return of the S&P 500. That doesn’t make 10% a guarantee; there are no guarantees in investing. This is just a middle ground between conservative investments, like bonds, and speculative investments, like individual stocks.
Adjust Your Investments for Inflation
Twenty years is a long time. Even during ordinary periods, that’s long enough for inflation to eat away at the value of any fixed-rate contributions. Be sure to account for that in your plans.
However you build your retirement plans, make sure to periodically adjust those contributions for the value of money. If you contribute $100 per month to this account, for example, try to adjust it to $105 in the next year. Ideally, actually adjust your investments based on current inflation numbers. Even small adjustments can keep you from steadily losing money to inflation over time.
Calculate Daily, Monthly and Annual Investments
Now we get to the core of the issue. If you have 20 years and want to reach $1 million in savings, how much do you need to set aside?
If we assume a 10% rate of return (again, not a guarantee but an estimate based on the historic average rate of return from the S&P 500), then the truth is that this will take a lot of money. The best way to figure out exactly how much you need to contribute, and on what basis, is by using an investment calculator.
In general, you will need to contribute around $1,400 per month to this account in order to reach $1 million in 20 years. For some investors, it may be easier to break this into daily contributions. In that case, you want to put about $50 per day into this account. Other investors may want to consider this in terms of annual income, which comes to $16,800 per year.
If you do plan this budget annually, make sure to invest the money in January rather than December. Market timing aside, you’re better off investing early so you can capture the gains of the coming 12 months.
Adjust Your Savings and Time Horizon
Now, the good news for people with a 401(k) plan is that this may be less difficult than it seems. If you have a job with matching contributions, your employer will likely cover several hundred dollars of those monthly savings.
Beyond that, the hard truth is that setting aside $1,400 per month is an enormous lift for most people. If possible, the best way to make this work is to find a way to save longer than 20 years. If you’re younger, can you start saving now? If you’re older, can you work a little bit longer?
Both might seem like difficult answers, but even adding a few years to your savings can make a massive difference. For example, it takes $1,400 per month to reach $1 million in 20 years. However if you can find 30 years to save, it only takes $475 per month to reach the same goal. This isn’t easy, but finding the extra time may be easier than finding an extra $12,000 per year.
Bottom Line
Given an average 10% rate of return on the S&P 500, you need to save about $1,400 per month in order to save up $1 million over 20 years. That’s a lot of money, but the good news is that changing the variables even a little bit can make a big difference.
Tips to Invest in Retirement
- A financial advisor can help you pick retirement investments for your financial plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free retirement calculator can help you figure out how much money you will need to pay for retirement.
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