David Lerner Associates: 6 Strategies to Help You Save a Million Bucks
But as the old saying goes, saving $1 million for retirement is like eating an elephant: You have to do it one bite at a time. David Lerner Associates Branch Manager John Koene offers the following tips to help you accumulate a retirement nest egg of $1 million or more:
1. Start saving early.“There’s simply no substitute for getting an early start to retirement saving,” says Koene .“This is due to the power of compounding interest over time.” For example, if you save a total of $4,682 a year (or about $390 per month) starting at age 25 every year for 40 years, you will accumulate a nest egg of $1 million by the time you turn 65 (assuming average annual returns of 7 percent).
Wait just 10 years to start, though, and you’ll need to save more than twice as much money every year ($9,894) for the next 30 years to accumulate $1 million by age 65. Wait until you’re 45 to start saving and this amount jumps all the way to $22,798.
2. Keep your taxes low.The good news here is that the government offers several tax-advantaged retirement savings vehicles you can choose from. These include traditional and Roth IRAs and traditional and Roth 401(k)s, which allow tax-deferred and tax-free growth, respectively, of your savings.
With traditional accounts, contributions are made on a pre-tax basis and taxes are paid when withdrawals are made during retirement. With Roth accounts, contributions are made on an after-tax basis and no taxes are due when the money is withdrawn in retirement.
3. Take full advantage of employer matches.Many employers match a percentage of the amount of money employees contribute to their retirement plans. For example, an employer might contribute 50 cents for every one dollar employees contribute to their 401(k) accounts.
“An employer match to your retirement account is the closest thing there is to free money,” says Koene .“If possible, you should contribute at least enough money to your employer retirement plan to be eligible for the full match.”
4. Set milestone savings goals.This goes back to eating the elephant one bite at a time. “Don’t focus on the $1 million,” says Koene. “Instead, focus on reaching attainable savings goals at different milestones in your life.” For example, your goals could be to build your retirement account up to $400,000 by age 40, $700,000 by age 50, $900,000 by age 60 and $1 million by age 65.
5. Don’t give in to “lifestyle inflation.”This describes what happens when your lifestyle rises commensurate with your income. “As your income (hopefully) rises throughout your life, try not to increase your expenses by the same amount,” says Koene. “Go ahead and splurge on something nice if you like, but strive to save as much of the extra income in your retirement plan as possible.”
6. Don’t make early withdrawals from your retirement account. Obviously, taking money out of your account prior to retirement is going to make it harder to reach your goal of saving $1 million. In addition to foregoing earnings opportunities on the money withdrawn, you may also be subject to taxes and penalties on these amounts.
“The same goes for taking loans from your retirement account,” says Koene. “Even if you pay the money back with interest, you may have lost out on earnings opportunities while the money was on loan out of your account.”
While there is no guarantee that following these strategies will result in your saving a million dollars, using these tips will help put you on the right path to retirement savings.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC