Five ways to build your first $1 million
A million dollars is a frequently-cited retirement benchmark, though it鈥檚 a decidedly feeble attempt to put a number on a moving target. The value of a $1 million nest egg is substantially different depending on whether you鈥檙e living in Kansas City or San Francisco, retiring at 62 or 70, or planning on a life expectancy of 75 or 90.
Still, it鈥檚 the number at which聽, and it鈥檚 certainly a good starting point. Someone who is able to amass $1 million by age 65 and expects to live another 20 years should be able to take out roughly $55,000 a year with inflation adjustments, according to聽.
How do you build that kind of capital? As it turns out,聽when聽you save can be just as important as聽what聽you save. 鈥淏y starting early, an individual can harness the power of compound growth to build their wealth. The sooner the compounding begins, the greater the effect over the long term,鈥� says聽, president of Trillium Valley Financial Planning in Sherwood, Oregon.
Let鈥檚 say a 25-year-old college graduate currently earns $50,000, and his salary will increase 3% a year. Here are five ways he could build $1 million if he starts saving right now:
1. Deposit cash in savings
Savings account rates are dismal these days, but you can聽聽with an online bank. To build up $1 million at that interest rate, this person would have to save $1,700 a month. That鈥檚 40% of his income, a savings rate not possible for most people.
Only after 35 years of salary increases would that $1,700 account for a more reasonable 15% of income, the percentage most experts recommend saving.
Age at first $1 million: 65听听
2. Save enough to grab 401(k) matching dollars
The average employer matching contribution to a 401(k) these days is dollar for dollar up to the first 6%, which is undeniably a hefty chunk of money. An employer match is invaluable, Tilp says, because it boosts a younger investor鈥檚 savings rate early on, so that money starts compounding sooner.
If this 25-year-old contributed enough to his 401(k) to grab a 6% match and invested at a 7% annual return, he鈥檇 have close to $1.8 million at age 65. 聽
Age at first $1 million: 56
3. Get that 401(k) match, then max out a Roth IRA
If this person maxed out a聽聽(based on the聽聽of $5,500 per year, with an increase to $6,500 at age 50 due to catch-up contributions) in addition to getting his 401(k) match, he鈥檇 have another $1.2 million, for a total of $3 million at age 65.
This is probably the sweet spot, as it鈥檚 a goal achievable by many people. Maxing out an IRA and contributing 6% to a 401(k) puts this 25-year-old鈥檚 saving rate at a little above 15%. If you feel like that kind of savings rate isn鈥檛 within reach, consider this suggestion from Tilp: Each time you get a raise, increase your retirement contribution by the amount of your raise.
Age at first $1 million: 53
4. Max out a 401(k)
Let鈥檚 say our 25-year-old skipped the Roth and instead chose to max out his 401(k) each year, which currently has a pre-tax contribution limit of $18,000 and allows catch-up contributions of an extra $6,000 a year beginning at age 50. With an employer match, and again assuming a 7% return, he should have roughly $4.7 million at age 65.
That may very well be more than he needs, and saving $18,000 a year on a $50,000 salary is unrealistic for many.
Age at first $1 million: 45
5. Max out a 401(k) and a Roth IRA
Finally, this is the real get-rich-quick scheme: Maxing out both a 401(k) and a Roth IRA every year would lead to close to $6 million by the time our worker reached 65. This person would be living large in retirement 鈥� but very, very small while he鈥檚 young, saving close to half of his income. In short, it鈥檚 not an attainable strategy for many people.
Age at first $1 million: 43
The bottom line
Most people don鈥檛 have to worry about saving too much for retirement, and it鈥檚 unlikely that many 20-somethings will be able to put away half of their income each year.
But the message here is that you don鈥檛 need to. Building $1 million in capital for retirement is entirely possible on even a small salary, provided you start early,聽, set an聽聽that keeps pace with the overall market over time and grab matching dollars from employers that offer them along the way.
Arielle O鈥橲hea is a staff writer at NerdWallet, a personal finance website.
