Saving a million dollars in 20 years is possible with a consistent plan, disciplined contributions and a reasonable rate of return. The exact path depends on how much you can save each month and the performance of your investments over time. Compound interest plays a major role, especially when funds are invested in accounts with long-term growth potential. Whether using tax-advantaged retirement accounts or regular brokerage accounts, small adjustments to savings habits and investment choices can add up over two decades.
A financial advisor can help you create a financial plan for your retirement needs and goals.
Delay Retirement, If Possible
Most experts no longer consider 65 the age of retirement. According to Social Security guidelines, full retirement age is now 67. Many other experts, from financial advisors to academics, go further and suggest that most Americans should consider 70 as 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.
There is at least one upside to this. 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. Working until 70 is usually better than attempting to rejoin the workforce 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.
A more aggressive portfolio allows you to contribute less each month. But you’ll need flexibility to recover from potential losses. 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. It offers 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 help preserve your money’s value over time.
Calculate Daily, Monthly and Annual Investments
If you want to save $1 million in 20 years, how much should you 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. Use an investment calculator to figure out exactly how much to contribute.
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 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. One solution is to extend your savings timeline beyond 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. If you can save for 30 years instead, you only need to set aside around $443 per month.
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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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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