If you want to retire as a multimillionaire, you don’t necessarily need to earn hundreds of thousands of dollars per year. If you can start saving toward the beginning of your career, you can put in relatively modest amounts and still end up with $2 million or more by the time you’re in your mid-60s.
Michael Gouldin, a chartered retirement planning counselor and senior vice president of retirement and wealth at OneDigital, breaks down the math needed to get to around $2 million by the time you retire.
Savings by Decade
“Assuming a 7% compound annual rate of return,” Gouldin said, you would need to save the following based on your age:
- Age 30: approximately $1,200 per month
- Age 40: approximately $2,600 per month
- Age 50: approximately $6,500 per month
- Age 60: approximately $29,000 per month
“Clearly, it is best to get started early,” he said. “That said, the purchasing power of $2 million for a 30-year-old is way different than that of the 60-year-old.”
In other words, with inflation, by the time someone who’s currently 30 retires, $2 million probably won’t go as far as it does now. Still, these numbers demonstrate the power of compound interest. If you saved 15% of your salary at age 30 to reach that $1,200 per month in retirement savings, that would mean you would need to earn $80,000 per year. But if you waited until age 40, you’d need to earn over $173,000 per year just to get to the same place in retirement.
Still, because of inflation and the varying retirement needs from person to person, aiming for $2 million or more isn’t necessarily the right approach.
“The better approach would be to find out what each person needs to spend in today’s dollars in retirement and then work backward from there to determine how much they should be saving to build a nest egg large enough to support that inflation-adjusted income need,” said Gouldin.
“In fact, if someone came to me and said they wanted to save $2 million by 65, my first question would be: ‘Why?'” he added.
Trying to reach a benchmark because it sounds good doesn’t mean that’s what will align with your desired retirement lifestyle. Maybe you can get by on less money, which could free up spending money now. Or maybe you want a more luxurious lifestyle in retirement or want to retire early, in which case you might need to save even more.
Getting to Your Savings Goal
Whatever savings goal you decide is the right number for your retirement, there are some best practices to get there.
One tip is to split your annual raise by putting half toward funding your current lifestyle and the other half toward savings, said Gouldin.
If you’re not intentional about saving more money as your income grows, it’s easy for raises to get absorbed by lifestyle inflation. Maybe you’ll buy a bigger house or a new car, and any extra money in your paycheck goes toward those new expenses. But if you intentionally set aside half of your annual raise, you can still enjoy a small bump in your spending while saving more for retirement.
Another tip is to diversify your investments and rebalance them at least annually, said Gouldin.
Doing so can potentially reduce risk and help you stay on track toward your retirement goals, even if certain areas of the economy get volatile.
Lastly, Gouldin advised focusing on more than just the savings number. If you understand why you’re saving money for retirement, you can be more likely to reach your goal.
“I would develop a plan so I knew exactly why I was doing what I was doing,” he said. “It can be difficult to save for the future, rather than spending in the present. Knowing why you are saving will help you stay the course.”
“Furthermore, knowing why you are invested in the mix of investments you have will help you stay invested through difficult markets, avoiding the risk of getting too greedy or too fearful at exactly the wrong time,” he added.
By taking these steps, you can improve your chances of saving and letting your investments grow enough to enjoy your desired retirement lifestyle. For some people, that will mean retiring with at least $2 million in their retirement accounts. Others — with clear intentions about what their goals are and why they’re saving — might find that they need less than $2 million and can save accordingly.
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