The current bull market may be into its ninth year, but many people still have not started taking their financial future seriously, or have been scared to invest after the Great Recession. Whether you are saving for retirement, or just saving for a rainy day, it is important to build up a strong financial nest egg for your future.
Everyone wants to retire comfortably, but few actually invest enough to be able to do so.
Or perhaps you are thinking about your more immediate future? Many Americans worry about their jobs being replaced by robots or other types of automation. If you lose your job — to a robot or for any other reason — chances are you will need a nest egg to fall back on.
What if you could save $1 million over the years? By following several simple rules compiled by 24/7 Wall St., it shouldn’t be that hard for people in their 20s and 30s to save $1 million by the time retirement comes along, or at least to have considerable savings in case they lose their jobs along the way. Most people think the retirement age for Social Security is 65, but for those of us born in 1960 and after, the retirement age is really 67. There has also been talk for years about pushing the retirement age up to 70.
If there is one takeaway from the following piece it is to start saving as much money as early as possible.
Saving $1 million over 25 years or more may seem very hard. You might think that those pesky student loans or car or house payments will get in the way, or maybe you just need money to enjoy life. However, it is not as hard as you may think — as long as your money is compounded and invested wisely.
The government may have Social Security for you in your golden years, but it is probably not going to be anywhere near enough to live off. It is important to understand that you are on your own when it comes to planning for your future.
Investors who do not save through 401(k) plans, IRA structures, and other retirement strategies are going to find out that taxes on gains, interest, and dividends can slow down the effects of compounding. With compounding, investments grow exponentially as gains and interest earned are added to your principal, forming a larger base for future gains. Still, the reality is many of us, particularly if we did not start saving early enough, are going to have to invest outside of retirement plans if we even hope to get close to $1 million in the years ahead.
We have identified major pitfalls that can wreck retirement plans, and we have also targeted strategies that investors can use to avoid getting distracted along the way. Now it is time to see how easy it is for investors to save $1 million over a lifetime if they are disciplined.
Before getting into some basic calculations, let us consider asset allocations and diversification. If you just invest in one or two stocks, chances are very high your money is too concentrated and you are taking on too much risk. If you only invest in medium- term notes and longer-term bonds from the U.S. Treasury or government agencies, then you are likely not getting enough interest through time to build up enough wealth.
As of 2017, many investors have become spoiled as the stock market recovered more than 200% from the March 2009 panic-selling lows. No reputable financial adviser will tell you to expect the same returns and market performance in the years ahead.
It is imperative to manage expectations and budget for realistic returns. Many investors used to think 8% to 10% gains per year were reasonable to expect. As of late 2017, long-term Treasury yields are close to 3%, and the average Dow Jones Industrial Average dividend yield is almost 2.50%. With a mix of stocks and bonds, and with some more moderate appreciation in the market ahead, investors should probably budget for conservative gains of 5% to 6% per year.
A way to start thinking about how to build a $1 million nest egg is to use a compounding interest calculator. MSN Money, Moneychimp, and many other online trading and money management sites offer this tool. Such calculators can help you compute your investment’s future value assuming certain savings and interest rates. It can also help you determine how much you need to save.
Some additional considerations include age and taxes. As you get older, you are likely to come by more money. This could come from higher earnings, but it could also come from an outside source such as selling a house, inheriting money, company stock options or profit sharing, or even a gift.
Also, the IRS knows it is hard to save enough to retire, so the government allows people who are 50 and older to have a “catch up” period until retirement in which they can save an additional $6,000 per year in 401(k) plans and another $1,000 per year in IRA plans. These allowances benefit older savers tremendously.
Here are several paths that will help you start saving up to that goal of $1 million if you get started in your 20s or 30s. It is still possible to hit the $1 million mark if you wait until your 40s or 50s to start saving — however, it will be considerably more difficult.
In order to be conservative with the numbers, we are using 5% returns as a base, and we are using annual compounding calculations (vs. monthly or quarterly) on the MSN Money savings calculator or the Moneychimp compound interest calculator. Each calculator will yield different results depending on whether your compounding is quarterly or annualized, when the additions are made (monthly or annual), and so on.