By Heidi Foster
The concept of retiring with over a million dollars in a retirement account is a goal for many people. Having financial goals and discipline is part of what it takes to save over a million in retirement savings. While the Employee Benefit Research Institute shows less than 1 percent of the 52 million 401(k) savers have crossed the million-dollar mark, research out of both Schwab and Fidelity show that with the plans they custody, they have seen the million dollar-plus 401(k) accounts approximately double from 2012 to 2014, with Fidelity reporting over 72,000 accounts in 2014.
401(k) plans are, of course, not the only way that people save for retirement. Many people still have pensions or use individual retirement accounts (IRAs) or another qualified plan; the data is simply more accessible for 401(k) plans. Is a million-dollar plus 401(k) or retirement fund a possibility for you? Probably.
The easiest way to save over a million dollars in your 401(k) is to start early. The power of compounding is rather amazing and having time on your side may be the easiest way to reach larger savings numbers. As an example, if you were to have a 7 percent compound annual interest rate and want to reach a million dollars, here is approximately how much you would need to save over the corresponding periods:
- 40 years – $ 5,009 per year
- 30 years – $10,586 per year
- 20 years – $24,393 per year
- 10 years – $72,378 per year
I often find that when people start saving later in life, they want to go and urge all of the young people they know to start saving early and often. I find that it is simpler to figure out how to save the money when you are young and flexible and are creative enough to figure out how to live on less. Even if you can only start with a little, it is important to get started.
How much do you reasonably need to save? How much you need is a choice of lifestyle. There are several rules of thumb to guide you according to various sources. First, try to save at least 10 percent of your annual income. Second, aim to have your investments replace 70 to 90 percent of your pre-retirement income; Social Security should fill in the rest. Third, work to save somewhere between 8 and 15.5 times your final year’s earnings. The higher numbers in these last two recommendations apply to those with higher incomes and based on the premise that Social Security will make up a smaller portion of their retirement income. A couple earning $175,000 per year might be better off thinking of saving $2.5 million versus just striving to cross $1 million.
It is a good idea to review your retirement saving at least annually to make sure that you are on track and to discuss with a professional investment adviser if your investment allocation has enough or too much risk to achieve your financial goals.
Heidi Foster, CFP® Wealth Advisor and Investment Manager with American Wealth Management and may be reached at www.ﬁnancialhealth.com, 775.332.7000 or heidi@ﬁnancialhealth.com. Securities offered through Foothill Securities, Inc. member FINRA/SIPC. Investment advice offered through American Wealth Management, a registered investment adviser and a separate entity from Foothill Securities, Inc. This information should not be construed as investment, tax or legal advice. The author is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.