If you’re a new graduate looking for the highest-paid job, creating a retirement account that has one million dollars in it by the time you’re ready to enter your Golden years might be your goal — but you’ll be broke for the rest of your life. That’s right, a Millennial who’s 32 today and retires with one million dollars will live below the poverty line. And a 42-year-old GenXer will have only $19,000 per year. It goes without saying that one million dollars doesn’t go as far as it once did.
When adjusted for inflation, one million dollars 40 years from now isn’t even close to what people will need to pay their housing, food, healthcare and other bills through the last decades of their lives.
The good news is, the sooner you start putting aside some money, the less you need to save each year to put together a healthy retirement nest egg.
Thanks to advances in healthcare, there’s a good chance you’ll live to be 100. That means you’ll live more than three decades after you retire. Before you get six-feet under, though, don’t you want to have some fun during those years? Travel? Play some golf? Live in a nice home? Throw dinner parties?
The big expense seniors face is healthcare. You’ll probably start out taking care of yourself while living in your own home, but, eventually, you’ll start using more prescription medicine and making more doctors’ visit.
If you don’t move in with family as you get older, you’ll either need a home healthcare worker or need to move into an independent living facility, then an assisted living home, and, possibly, a memory unit during your final years. Today, that can run one senior more than $100K per year.
For 2018, the maximum monthly Social Security check is less than $2,800 — and that’s if the person worked full-time for 40 years (no contractor or freelance years).
If you’re planning on Social Security, Medicare and a company pension, don’t bet on those being there. Who knows if entitlements like Social Security and Medicare will even be around in 40 years (or even 20 years?).
If saving up to retire with two-or-three million dollars while you’re trying to pay your bills each month sounds tough, it’s not if you start early. The key is to take advantage of something called compound interest. Compound interest is the interest you earn on your interest.
For example, if you put money into a 401(k), your money earns interest. That interest is now your money, and you earn interest on that money. Compound interest multiplies rapidly (often daily) and never stops increasing.
This is different from other types of investments, such as stocks. When you buy stocks, you might make money some years and lose money other years. Even if you make money each year, the amount will vary.
The sooner you start sticking money into accounts that earn compound interest, the sooner you start the multiplier effect — and the less you have to save over your lifetime.
For example, if you’re 25 today and you start putting $650 a month into your 401(k), you’ll have one million dollars by the time you retire in 40 years. Add to that the value of your home — which you should have paid off — and your monthly Social Security check, and you might be in good shape; especially if you have a partner who’s saved.
If you think, “I’m too young to think about retirement right now. I’ll wait until I’m 35 and then I’ll start saving,” you’ll need to save $1,200 a month to earn one million dollars in 40 years. And at age 35, you might have a family, house payment and other bills you don’t have now.
The first step in creating a smart retirement plan is to calculate your “retirement number,” or the amount of money you’ll want to have on the day you retire to live at a certain comfort level.
For example, let’s say you want to retire at age 65 with an annual income that’s similar to $75,000 today. You’ll need to determine how much money you’ll have to have saved on the day you retirement in the year you retire. You can do this using an online retirement calculator to get a general number.
You can even play around with one to see what it would take to earn one million dollars by age 40. By entering your current age into the calculator, your desired retirement year and your desired annual income. You’ll be asked about your current savings. Using this information, the calculator will tell you how much you’ll need to save per year from now until you retire.
You’ll get a more accurate number, as well as helpful ideas for maximizing your strategy, if you hire a financial planner to help you. A financial planner will look at your investment options, such as if you have a company pension or 401(k), or if you should go into other tax-sheltered products like an Individual Retirement Account.
You have money you don’t know about.
If you’re like most Americans, you’re probably not aware that you can “raise” enough money to increase your retirement savings without cramping your personal lifestyle. The way you do this is to cut the waste from your monthly expenses budget, then invest the savings. Many people overspend by thousands each year on items they can get for lots less, just by smarter shopping.
For example, why buy brand name pasta or canned corn when you can get the store brand for half price? If you have a favorite brand of pizza, wait until it goes on sale every few weeks, get it for half price, and stick a half dozen of them in the freezer. It’s easier than you think to save $100 or more per month on groceries.
You can also get many of the things you need free on Facebook, Nextdoor or Craigslist. Or, if you’re really ambitious, you can pick up a side hustle, working a few hours a week or on weekends to fund your savings. Don’t believe you need to kill yourself working or live like a hermit to improve your finances, however.
Are you paying too much in credit card interest? Shop for the best cards to minimize your fees and interest and maximize your rewards.
The key to not having to worry about your retirement is to start saving early. Meet with a financial planner to discuss your goals, take a look at your current spending, calculating (and sticking to) a monthly budget, and you’ll start to see your investment money pile up.
Take the first step today and you’ll see how quickly you can get the ball rolling.
All images via Pexels
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