Saving for retirement is more important now than ever. After all, in 2020, just 15% of employees working in the private sector had access to defined benefit plans (also known as pensions). And that percentage is more likely to fall further than it is to increase.
This has led to the rise of employer-sponsored retirement plans such as the 401(k) in addition to the individual retirement account (IRA). But what if you aren’t satisfied with just saving a bit here and there, merely hoping you will have enough to retire? What if you want to save and invest enough to retire a millionaire?
People tend to think retiring a millionaire is difficult, if not impossible, especially if you aren’t making at least six figures. In reality, it’s possible to retire as a millionaire even on a modest salary.
I asked experts in saving, investing and retirement to give their best tips on how to retire a millionaire. Below, we’ll go over some of the top tips they had to share.
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Use Every Opportunity You Have To Grow Your Nest Egg
These days, there are many ways to save and invest. You should take full advantage of all of those opportunities, said Ben McLaughlin, head of SaveBetter. “For example, take advantage of tax deferred retirement plans from your employer or IRAs, and contribute the maximum you can afford. If you have extra cash, invest a percentage each paycheck and save a percentage each paycheck. That way when you reach retirement you will have a healthy portfolio that meets your personal risk/return objectives with a dedicated percentage to cash or cash equivalents for the unknowns.”
In reality, there are many ways to grow your nest egg. Annette Harris, founder at Harris Financial Coaching, also provided input. “If you’ve reached the contribution limit with your employer’s plan, there are other sources you can use to contribute after-tax income,” Harris said. “You can contact a financial institution to begin contributing to an additional retirement plan. Retirement plans could include a traditional IRA, a ROTH IRA, a SEP IRA, or a brokerage account. These types of plans allow you to continue to build a financially secure retirement and increase your rate of return and enable you to get a better return on investment than a traditional savings account.”
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Diversify Your Savings Plan
Related to the previous tip, there are many different ways to save. And using many different strategies can be a form of diversification, and this can make your nest egg more resilient. “You’ve likely heard the saying, ‘Don’t put all your eggs in one basket.’ And the same is true for your investments,” McLaughlin said. “How much of your portfolio you allocate to an asset class depends on your time horizon (when you expect to retire) and your risk/return appetite. Typically, depending on your portfolio mix, you would allocate a higher percentage to safer investments like cash and bonds the closer you get to retirement.”
Budget For Savings
Often when we think about budgeting, we only think about expenses, such as rent or a car payment. But Robert Johnson, professor of finance at Creighton University, said you should also budget for savings. “Specifically, one should not simply budget and track expenses, but one should budget for savings,” Johnson said. “Warren Buffett is quoted as saying ‘If you want to make saving a priority, take a look at how you budget. Do not save what is left after spending; instead spend what is left after saving.'”
This is a powerful quote from Buffett and highlights the importance of prioritization when budgeting. Johnson continued, adding that, indeed, we must prioritize when we budget. “You don’t successfully build wealth by simply taking what you have left after all your expenses. We accomplish what we prioritize. Prioritize savings and invest those savings.”
Make Retirement and Savings Contributions Automatic
Making retirement and savings contributions automatic will make you much more likely to invest your money consistently. If your contributions are out-of-sight, out-of-mind, you probably won’t even miss the money you never had in your bank account. “People should try and automate as many financial decisions as they can,” Johnson said. “One of the best ways to save money is to make it automatic. For instance, have an amount taken out of each paycheck and put directly into an investment fund — most appropriately a low cost stock index fund.”
Avoid High-Interest Debt
There are some scenarios where high-interest debt is unavoidable, especially for those who have poor or no credit. But if you want to be a millionaire, you should avoid high-interest debt if possible, said Deacon Hayes, founder of WellKeptWallet.com. “Debt like credit cards and personal loans can really work against you when you are trying to grow wealth and save up a million dollars. This is because the interest rate can be more than your actual investment returns. Instead find ways to pay cash for large ticket items like a car or furniture so that you pay less in interest and are able to save more in the long run.”
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Last updated: Sept. 3, 2021