Few words get people charged up more than “millionaire.”
Who doesn’t want to be a millionaire? We certainly do. But is the elusive milestone even reachable? Well, in short, yes. But not without some careful planning and discipline. Time is a key factor, of course. It all depends on your age, when you plan to retire, what kinds of accounts you use, your investment costs and your risk tolerance. The more you are able to save on a regular basis, the less risk you need to take and the less time it should take to hit that first million.
We asked a variety of experts for tips on getting to that magic million milestone. Here are their answers.
Mark Bell-Berry, a mortgage advisor with Chalfont Investment Consultants, said starting early is key to saving $1 million. “Even when you are just saving for a mortgage deposit, be prepared to make those early sacrifices,” he told Business Insider. “Curtail excessive lifestyle choices. Learn to live frugally, as much as you can bear. This will bear fruits later on, both in terms of reduced repayments and fewer years doing it.”
The attraction of paying off your mortgage as soon as possible is obvious, but Bell-Berry pointed out the advantages of keeping it going while investing in other long-term schemes.
“The repayment will eventually finish,” he said. “So assuming your rate of repayment is manageable, using available funds elsewhere will spread your chances of a heightened return, in addition to owning your property.”
Start Saving Now
Suppose it’s not “early” in your life and career? All is not lost.
If you are 35 and starting from scratch, for example, you need to save around $735 per month to have $1 million by age 65, assuming an 8 percent average annual return. If you are 40, you need to save around $1,135 per month. If you were willing to take on more risk with your investments and managed to average a 10 percent annual return, you would only have to save around $506 per month from age 35, or around $850 each month from age 40. If you were more conservative, you would need to save more. You get the idea. (You can use the SEC’s calculator to plug in your age and determine monthly contributions.)
Keep in mind that these numbers do not take potential investment costs into account like management fees and fund expense ratios, which could decrease your annual returns by more than 2 percent. This means that you will likely need to contribute more and/or take on more risk to meet your goal. They also don’t take into account inflation and taxes (we’ll get to that in a minute).
Max Out Your Retirement Accounts
So, where is the best place to save this money for retirement? In tax-advantaged retirement accounts, of course! We’re talking about your 401(k), 403(b), traditional IRA and/or Roth IRA. These kinds of accounts allow you to avoid paying taxes on market growth (capital gains), which really makes a big difference in how much you can accumulate over the long run.
If your company has a plan available, the easiest thing to do is to save there through automatic payroll deductions. 401(k)s and plans like them have a 2019 contribution limit of $19,00 or $25,000 if you are over 50. If your company offers a matching contribution (AKA free money), you definitely want to put in at least as much as they will match.
If you have maxed out contributions to your company plan and still want to save more, you can put an additional total of $6,000 (or $6,500 if you are over 50) for 2019 in a traditional or Roth IRA. Remember that Roth IRAs — unlike their traditional counterparts — allow you to grow post-tax money that you can potentially pull out totally tax-free in retirement.
If you do not have a company plan available and are an entrepreneur, or even if you do have a company plan but also freelance part-time, you may be able to open a SEP IRA or Individual 401(k), two other types of traditional IRAs.
Always Remember Taxes And Inflation
It’s also important to remember that, while hitting that seven-figure mark is still a major milestone, $1 million today won’t be worth that much in 25 years. Assuming an average inflation rate of 3 percent, it would only be worth around $475,000 in 25 years. (The average annual inflation rate has remained below 3 percent in every year since 2012.)
If you want an inflation and tax-adjusted balance of $1 million by age 65, you may need to save upward of $2,600 per month from age 35, or $3,200 per month from age 40, assuming an 8 percent return, and not including investment fees or state taxes. (We know: GULP.) Of course, that’s also assuming that you’re starting from scratch and accounting for 3 percent annual inflation. (You can do your own calculations with Bankrate’s inflation calculator tool.)
Follow The 10-10-10-70 Rule
While self-made millionaires are often assumed to be self-starters, it is possible to get rich on someone else’s clock.
Jeff Lestz is now the CEO of his own company Genistar, but he made his first $1 million when he was 31, six years after he started working for a large financial services firm.
He said to save up that much money, he followed what he called the 10-10-10-70 rule of spending.
For every paycheck he earned during those years, he gave 10% to charity, saved 10% in a short-term easy-access fund, invested 10% in a long-term plan that was locked in until he was 60, and learned to live on the remaining 70%, including all mortgage payments, taxes and insurance.
“It’s not what you make — it’s what you keep,” he told Business Insider.
Maintain Good Habits
In addition, every time Lestz got a pay raise, he maintained exactly the same level of expenditure as he did before, and put away the difference.
“It’s human nature to increase your outgoings as soon as your income goes up,” he told Business Insider. “But it’s actually much easier than you realize not to, because you don’t have to make any changes or sacrifices to your lifestyle. It’s simply a question of habit.”
Apart from rock stars and pro athletes, self-made millionaires are often those who have spotted opportunities others have missed and getting in early.
“These endeavors are usually risky and many fail, so you have to be prepared to take these risks, carry the losses and bounce back with new ideas,” Felix Eaton, an entrepreneur-turned-inventor, told Business Insider.
“Also, believe in the product or service you’re offering. Believe to a ridiculous degree, particularly if you’ll need to persuade others to back your ideas.”
Eaton said it’s all about your mindset.
“If you believe your product is viable, you’re prepared to risk losing your investment, the financial loss is something you can recover from, what have you to lose?” he said.
Follow Your Hunches
For Eaton, it doesn’t stop with that initial leap of faith.
“Repeated new investment in new ideas and products will grow your abilities and wealth,” he said.
“Of course, your good decisions have to outweigh the failures, at least in financial terms. That is where the constant need to gamble on your hunches will separate the millionaires from the billionaires — and also the bankrupt.”
“There is a lot of luck involved, but luck favors those trying to break the mold.”
We know this may seem daunting; most people aren’t in a position to save $2,600 or more per month. But it does highlight the importance of starting early, or retiring a little later, in order to reach your retirement savings goal. Hopefully, you don’t have to start from scratch and you can build upon some base savings. You will help yourself a lot by saving extra cash (e.g., bonuses, tax refunds, inheritances) in tax-advantaged retirement accounts whenever possible, opening no or low-fee IRAs at a discount brokerage firm, and choosing lower-cost investments like indexed mutual funds and exchange-traded funds. Whatever your goal, the most important step you can take is to start saving anything you can now so your money can start growing and you’ll be that much closer to reaching $1 million, or whatever your personal retirement savings goal may be.