If you've ever dreamed of saving a $1 million nest egg for retirement, you're definitely not alone. Our retirement plan advisors often speak with clients hoping to attain this worthy goal.
If you share this common investing dream, we've got some good news for you: Saving $1 million for your retirement is a realistic goal -- as long as you're willing to invest a bit of time and effort into some strategic financial planning, as well.
Here's how to grow your retirement nest egg all the way to a cool $1 million.
Strategic Financial Planning: Start Saving Young
When it comes to building that $1 million nest egg, the sooner you start, the better -- and that means starting the savings process when you get your very first paycheck. For instance, if you accumulate just $4,682 per year starting at age 25 and average a 7 percent return over the next 40 years, you'll reach your goal at age 65.
The best way to achieve this? Maxing out your Roth, 401(k) or 403(b) contributions and taking advantage of employer match policies. In fact, if your employer offers a match and you don't take advantage of it, you're simply turning free money away.
But don't delay! Using the same assumptions, if you start saving 10 years later at age 35, you'll need to sock away $9,894 each year -- and $22,798 per year starting at age 45 and $67,643 starting at age 55 -- to hit $1 million by retirement age.
Along the way, set some intermediate goals to boost your motivation and renew your enthusiasm. For instance, when your account hits a milestone figure such as $50,000 or $500,000, take time to celebrate your accomplishment.
Keep in mind that our assumptions include, on average, a 7% market return per year. All investments involve risk, including the risk of loss and the risk that the market may, on average, do far below 7%.
Wealth Management Fees: Watch Out for Unnecessary Expenses
When you're choosing investments, keep your eye on the expense ratio of each transaction. Select only investments with low fees and expenses because, after all, the cost of the investments themselves is the only thing you really have any control over!
Be wary of actively managed funds, which have high expense ratios thanks to factors such as commission costs, front load fees, and 12b-1 fees. Instead, focus on index or other passively managed funds; you'll usually pay only from .1 to 1 percent, which represents a savings that willl add up over time.
Strategic Wealth Management: Minimize Your Tax Burden
When it comes to reducing your tax burden, retirement accounts offer multiple options: Pay income taxes now or pay them later. Saving in a tax-deferred 401(k) or an IRA lowers your current tax bill and allows you to save without paying additional income tax. For instance, if you're in the 25 percent tax bracket and you put $5,000 per year in your IRA, you'll save about $1,250 on your annual tax bill. However, you will have to pay those taxes when you withdraw that money in retirement.
Alternately, a tax-exempt Roth 401(k) or Roth IRA allows you to essentially pre-pay your income taxes while you're still earning a paycheck. When you take disbursements in retirement -- or leave an inheritance to your beneficiaries -- you won't have to pay taxes on your returns as long as you've held the account for at least five years and are over 59 1/2 when you withdraw..
Personal Wealth Management: Hang on to that Nest Egg
While your growing retirement savings may make you feel flush, resist the urge to tap into those funds. Early withdrawal sets you back in a number of ways, including:
- Takes longer to meet your $1 million goal
- You'll miss out on compounded interest
- You may have to pay income tax on your gains
- You may incur a 10 percent early withdrawal penalty
Similarly, even if your income increases, don't let your lifestyle get overly lavish. Instead, take those extra earnings and secure them in your retirement accounts. Make it easy on yourself: Simply kick your contributions up a percentage point or two whenever you get a raise.
Finally, don't spend your $1 million too quickly. It may feel like a lot of money -- and it is -- but consider that you'll likely need to spread it out over 20-30 years or maybe longer. At a 4% draw-down, $1 million equals about $40,000 in annual income; it's not an excessive amount, but when combined with Social Security, is enough to provide for a comfortable retirement for many Americans.