Like other things in life, saving for retirement is easier when you have a specific goal. And while $1 million doesn’t have to be your magic number, for most Americans, saving up a nest egg of a million is a pretty safe bet. There’s no way to know exactly how much money you’ll need in retirement. After all, you don’t know how long you’ll live or what unexpected costs you may face, but there are some general guidelines out there worth paying attention too.
The best news is that saving up $1 million isn’t as hard as it might seem, thanks to the power of time and compound interest. The trick is saving as soon as possible, so many experts advocate for starting at 25, where you’re just out of college, and starting your first “grown up” job. While your new job may offer their own retirement program (such as self-directed IRA services, or 401K services), some don’t. Here’s where your own effort and research will have to come in.
For a 25-year-old, time is your biggest asset as an investor, and starting young — for those who can — is the best way to ensure a comfortable retirement.
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Assuming a 10% annual rate of return — the historical average of the S&P 500 — and 40 working years remaining, a 25-year-old could build a $1 million retirement nest egg by saving just $175 a month in their investment accounts. Their total contributions over those 40 years would amount to less than 10% of that total — just $84,000. All the rest would come from returns on investment.
That said, contributing a set amount of money each month over your entire career may be unrealistic, especially given that young people tend to earn more money as their careers progress, and they may also need to pay down college loans or save up for major purchases like a home. Inflation will also lower the value of a defined contribution. However, that also means younger people may want to set their goal above $1 million, as the dollar’s buying power is sure to decrease significantly between now and when they retire.
One smart strategy for keeping up with inflation is simply to raise your contribution each year by 3%, the historical inflation average. This should be manageable, as annual raises tend to match cost-of-living or inflation rates.
No matter how you start, starting early — even if you have very little to save — is vital, as it will maximize the benefits of compound growth. Investing just $50 a month from age 25 to 35 would yield a nest egg of $10,000 in 10 years. As you age, such a head start can make a big difference in your ability to reach your goal, as you’ll see below.
Talk to an advisor, and do a little research. A little effort goes a long way.