Can saving $1 billion bucks on your 401(k) seem like an impossible objective? It doesn’t have to be. Here’s how to do it.
Do you have $1 million in your 401(k)? If you said no, you’re definitely not alone. But you might be surprised by how feasible this retirement savings goal actually is. Of course, you’ll have to put your mind – and money – to it.
401(k) savings vary
The average account balance is $75,358, according to the latest data on 27.1 million 401(k) plan participants from the Employee Benefit Research Institute. And Fidelity recently reported that the number of their 401(k) plans with a balance of $1 million or more jumped to a record-high 196,000 in the second quarter of 2020.
Then there is the very worrisome data on the other side of the coin.
The Board of Governors of the Federal Reserve System notes that 26% of Americans have no form of retirement savings at all. The report also found that 44% did not feel their retirement savings were on track.
How to start saving more
If you have a generally secure job with a solid income, saving more money is easier to do. Having time on your side helps as well. Let’s say you make $75,000 a year, enjoy a 3% pay raise every year, plus your company gives you a 50% match on the before all else 6% that you contribute to your 401(k) – a common company match. If you can obtain a 7% annual return on your money, then getting to $1 million requires contributing just 7.3% of your paycheck every year for 30 years, said Jason Hull of Hull Financial Planning in Fort Worth, Texas.
If your salary is less, or you obtain a smaller company match, then you’ll have to put a higher percentage of your paycheck toward savings. Try using a 401(k) calculator to obtain an idea of how many you need to contribute to your savings.
‘Work Your Way Up’
Saving $1 million may not be easy. But for many Americans, it’s not impossible. It does, however, require a focus on current spending and future goals.
Saving $1 million "is definitely possible, but to perform it folks actually will need to have focus on exactly what their objectives are, also " said Jeff Gorton, a certified financial planner and founder of the Gorton Financial Group in Oklahoma City.
That means thinking long and hard about where your money is going now, whether that’s the best use of your money or if it makes more sense to stash that money away.
"If you overlook ‘t sacrifice some of your lifestyle now, then what you’re really doing is sacrificing your future lifestyle," Gorton said.
Maybe you’re able to ‘t contribute the annual maximum of $18,000 ($24,000 if you’re 50 or older) to your 401(k). That’s OK. "Start where you’re in and work your way upward," Gorton said.
A true 401(k) story
Here’s some inspiration for you: Gorton knows a mechanic – an employee in his early 60s – who is currently contributing $24,000 to his 401(k).
That’s half of his salary. Half.
"He isn’t earning a great deal of cash, however he’s placing in his 24,000," Gorton said. "He’s been a mechanic for over 30 decades. He’s attempting to beef up his retirement just as many as he could. Each time that he gets a lift, he attempts to place partially half the increase to his 401(k). "
Time Not On Your Side?
If you’re in your 40s or 50s and thus with less time on your side, then you’ll have to figure out ways to squirrel away more.
"If you begin at age 50, a few putting off $48,000 annually, at age 65 should they make zero attention they’re likely to have nearly $750,000," Gorton said. "If you create modest yields, it is possible to readily be $1 million. "
Of course, $48,000 is a lot of money. Still, some of the people on the forefront of the financial independence movement embrace the idea of living on many less. Don’t even purchase a new vehicle. Dine less. You obtain the picture.
Take Peter Adeney, or Mr. Money Mustache because he’s known as. The favorite blogger along with also his wife and young son live about $25,000 annually (they reside in Colorado and have their home outright).
A $1 billion retirement accounts "can generate an income of roughly $40,000 a year for many decades, and you can add in any Social Security or other pension income on top of that," explained Adeney.
"But I’d advise people with above-average incomes to think even bigger: alongside that trickle of $18,000 a year into the 401(k), put additional savings into a Roth IRA if applicable, and even more into plain old Vanguard index funds in an after-tax account," he explained.
"If you can save more than half of your take-home income and learn to live well on the remainder, you’ll have enough to retire in only 17 years. If you can save two-thirds, your mandatory working career can be under 10 years. "
Mr. Money Mustache’s manner is not for Everybody. By way of instance, he can his own home upkeep – a job that not everybody can or wish to perform.
The crucial thing is to take some time today to consider your spending and be sure it meets your worth.
"I’m a fan of spending lavishly on the things that are important to you and eliminating the things that don’t matter for you personally," Hull said.
Here’s another way to power your savings higher: Find ways to gain income, such asking for a raise or finding an additional income source, such as a part-time job. Then funnel that money into your retirement savings account.
Also, make sure you’re investing in low-cost index mutual funds. "Don’t try to chase returns," Hull said.
"Active investors, store timers – they underperform the store," he explained. "It’s going to be a long haul. You’re not going to obtain to $1 million in five years just by investing in your 401(k). "
This article originally appeared on MarketWatch.com.
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