Retiring with $1 million is a goal many people have. And you might assume that to achieve it, you’ll need to not only make huge sacrifices during your working years but also be an investing genius.
Well, here’s the reality. You do need to make some sacrifices to accumulate a large chunk of wealth, but you don’t need to deprive yourself of every single luxury imaginable. And you definitely do not need to be an expert investor to reach the $1 million mark. If you follow these simple moves, you can accrue $1 million for your retirement without breaking a sweat.
1. Give yourself a long savings window
If you wait until your 40s or 50s to begin saving for retirement, you may need to part with quite a lot of money each month to eventually wrap up your career with $1 million. But if you start much earlier — ideally, in your 20s — you’ll get away with saving a lot less on a monthly basis.
Say you’re 40 and want to retire at 65. Let’s also assume you’re able to generate an 8% average annual return in your retirement plan, which we’ll talk more about in a bit. If you want to close out your career with $1 million, you’ll need to sock away about $1,150 a month in your IRA or 401(k) plan. On the other hand, if you were to start funding your retirement plan at age 25, thereby extending your savings window by 15 years, you’d only need to set aside $350 every month to hit that $1 million target. And that’s a much easier sum to work into your budget.
2. Load up on S&P 500 index funds
Investing your money wisely is essential to helping it grow, and stocks are a good idea for your retirement plan since they generally offer much higher returns than bonds. But if you’re clueless about picking stocks, there’s an easy option to fall back on — index funds.
Index funds are passively managed funds that aim to match the performance of the market indexes they’re tied to. There are different types of index funds, but for the purpose of growing retirement wealth, index funds that aim to match the performance of the S&P 500 are a good bet. Not only do these funds give you instant diversification in your retirement portfolio, but the S&P 500 has a strong history of performing well. Over the past 30 years, in fact, it’s delivered an average yearly return of above 12%.
Now, remember the 8% average annual return we used in our example above? For a retirement portfolio loaded with S&P 500 index funds, that’s a very fair assumption since it’s several percentage points below the S&P 500’s average return over the past 30 years. It also allows for the fact that as retirement nears, you’ll likely unload some of those S&P 500 funds in favor of bonds, which are less volatile. But the point is that choosing investments that deliver a strong return isn’t difficult. If you’re content having your portfolio generate a return that matches that of the S&P 500, you’ll basically be all set with index funds.
And there you have it. If your goal is to kick off your senior years as a millionaire, sticking to these two simple rules could be your ticket to the retirement you’ve always wanted.
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