Saving a fortune isn't realistic. However, it is realistic to have $1 million in a retirement account by the age of 65, if you invest a portion of your paycheck in stocks and let the power of compounding interest work some magic.
Last updated: July 22, 2021
How Much You Should Save For Retirement
Aiming for the $1 million level of savings is a good starting point, said Karen Kruzel, a fiduciary investment advisor at Unified Trust Company in Lexington, Kentucky.
"Using the '4% rule' -- drawing 4% annually from retirement savings -- this level of savings, coupled with Social Security benefits, will probably meet all spending needs for the long duration of retirement," Kruzel said. "However, $1 million may not be appropriate for everyone."
If you plan to live an expensive retirement lifestyle that includes frequent travel or a vacation home purchase, you will likely need more than $1 million. Other people might need less, assuming they're frugal in retirement and remain in good health.
"No two people will have the same exact retirement needs," said Chuck Mattiucci, a financial advisor with Fort Pitt Capital Group in Pittsburgh, Pennsylvania. "There is no one-size-fits-all approach to retirement planning."
How To Estimate Your Needs
To determine how much you'll need, you have to think about what you want your retirement to look like. Typically, financial planners advise people to replace 70% to 85% of their income in retirement. These funds can come from savings, Social Security and pension income.
You can estimate your retirement income using Fidelity's free online calculator or the free FuturePath planning tool from T. Rowe Price once you create a guest account.
Financial planners typically recommend setting aside 15% of your salary annually (including matching contributions from an employer) to save enough for a comfortable retirement. A recent Fidelity Investments analysis of 401k participants who have salaries below $150,000 per year but $1 million or more in their accounts revealed that they save an average of 14% of their salaries.
Unfortunately, 42% of Americans have less than $10,000 saved for retirement, according to a GOBankingRates survey. But you can still reach the $1 million mark if you start now and follow these tips.
How To Save $1M
On average, the stock market has returned 10% annually over the long term, but this rate is closer to 6% when you adjust for inflation. Americans who start saving early have a strong advantage over those who wait until their 40s or even 50s to plan for retirement.
Investing in stocks -- or mutual funds that hold a variety of stocks -- is the key to getting the returns you need to reach your goals. Fidelity Investments found that those with more than $1 million in their 401(k) accounts had more than 70% of their assets invested in equities.
How To Save $1M Starting at Age 25
Assuming a 10% return, you will need to save about $158 per month to have $1 million by age 65 if you start investing at 25. With a more conservative 6% annual return, you will need to stash $502 in savings each month.
The younger you are when you start saving, the less you will have to set aside each month to amass $1 million by retirement. For this reason, it's important to get into the habit of paying yourself first, starting with your first paycheck, said Kevin Smith, executive vice president of wealth management at Smith, Mayer & Liddle in York, Pennsylvania.
Steps To Take
It's a good idea to have contributions to a workplace retirement account deducted from your paycheck automatically. According to Smith, you won't have a chance to spend the money, and you'll get used to living on what is left after you pay yourself first.
If there's not enough room in your budget to set aside 15%, save enough to get the full matching contribution from your employer, assuming your company offers a match for retirement contributions. Otherwise, you're leaving free money on the table.
How To Save $1M Starting at Age 35
If you wait until age 35 to start saving, you'll need to set aside nearly twice as much each month as if you'd started a decade earlier. Assuming a 10 percent annual return, you will need to save about $442 a month to have $1 million by age 65. With a 6% return, you will have to save $995 per month.
As you move up the career ladder and start earning more, you should increase your retirement contributions with each raise or bonus to make up for lost time.
Steps To Take
"By slowly increasing your monthly contributions, even by a few dollars each month, this will then ease the stress of having less take-home pay," said Leslie Tayne, a debt attorney in Long Island, New York, and author of "Life & Debt."
It's important that individuals in this age bracket resist the urge to increase their spending as their income rises.
"One of the best tips to becoming a millionaire is to live within your means and stop living like a millionaire," Smith said. "Those more likely to be millionaires frequently are common, everyday Americans ranging from plumbers, construction workers and schoolteachers to laborers, salespeople and middle managers who developed sound financial habits early and put investment monies aside on a regular basis, while keeping expenditures in check."
How To Save $1M Starting at Age 45
You will have to save about $1,317 a month and earn 10% annually on your investments to have $1 million by age 65 if you wait until age 45 to start saving. With a 6% return, you will need to save $2,164 a month.
Steps To Take
Setting aside that much each month can be especially challenging for parents who have kids in college. Nearly half of Americans place a greater importance on helping their children pay for school than saving for their retirement, according to a recent poll from RBC Wealth Management-U.S. Unfortunately, retired individuals don't have access to loans the way college students do.
Parents whose kids are currently away at school might want to consider downsizing to a smaller home in their 40s to lower their housing costs and have more money to set aside for retirement.
How To Save $1M Starting at Age 50
If you wait until age 50 to start saving, you will need to stash about $2,413 a month with 10% annual returns, or $3,439 a month with 6% annual returns, to have $1 million by age 65. Taking advantage of catch-up contributions can help you reach this goal.
It's clear that reaching your retirement saving goals is easier when you begin setting aside funds in your youth.
"Time is your friend," Kruzel said. "Start now and make saving a priority."
Steps To Take
You can add an extra $6,000 to a 401(k), 403(b) or 457 plan for a maximum contribution of $24,500. Additionally, you can boost traditional and Roth IRA contributions by $1,000, bringing the total amount you can set aside in these accounts to $6,500.
People in their 50s shouldn't shy away from equities, either. Fidelity Freedom Funds, which are target date funds that automatically adjust asset allocation based on a retirement date, still include equity investments for those in their 50s. Being too conservative can hurt your chances of getting the return you need to reach $1 million by age 65.
If you need help creating a plan to reach your savings goal, start by asking if your employer offers access to investment advice as part of your benefits package. Also, look into other investments to grow your money. Otherwise, consider meeting with a financial planner.
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Gabrielle Olya contributed to the reporting for this article.