How to Save $1 Million Before Retirement

toy piggy bank tied on top of a toy car saving depiction

When planning a savings strategy that will help you reach your retirement goals, the first step is to determine how much you need to save based on your income and retirement lifestyle plans. If $1 million is your number, you may be wondering whether that's an attainable goal.

Can you save $1 million by retirement? It's possible, but it takes hard work, time and discipline. Read on for tips to reach your goal of retiring with $1 million.

1. Automate Your Savings

Automatically deducting a portion of your paycheck to put into your retirement account each payday can help you contribute regularly and stay on track with your savings goals. By "paying yourself first"—in other words, automatically saving for your future each payday—you won't be tempted to spend money that would better serve you if set aside for your retirement.

One of the easiest and most effective ways to invest for retirement is to set up automatic deposits into your 401(k) or IRA. 401(k)s and traditional IRAs allow you to invest your money on a pretax basis, which means it will grow (and compound) tax-free over time. It'll be taxed as income when you tap into it in retirement, when your earnings will likely put you in a lower tax bracket.

Some employers match at least a portion of the contributions their employees make to their 401(k) accounts. Always aim to put in at least as much as your employer will match—not taking advantage of the match is like leaving free money on the table.

If you reach your contribution limit for your retirement account contributions or want to consider other methods of investing, you have options. You may consider setting up automatic transfers to a high-yield savings account or directly investing your money in real estate, stocks, bonds or exchange-traded funds. You can also invest in an index fund such as an S&P 500 fund. The stocks included in this index achieved a high average annual return of 13.6% between 2010 and 2020, according to data from Goldman Sachs.

Keep in mind, investing directly in the market may require quite a bit of work to manage and also carries risk, but you're at an advantage if you have multiple decades between you and retirement. That way, you'll have plenty of time in the market to ride out the highs and lows.

2. Start Early

If you haven't yet started saving for retirement, you're not alone. According to the 2020 Federal Reserve Report on the Economic Well-Being of U.S. Households, 1 in 4 adults have no retirement savings whatsoever. While most nonretired adults have some form of savings, just 36% said they felt on track to financial freedom in retirement.

The best time to start working toward your retirement savings goal is right now—even if you work part-time. The younger you are when you start saving, the better. And while $1 million is ambitious, it could be within reach if your contributions have time to grow.

Time is of the essence when it comes to saving for retirement. Waiting even five or 10 years could make a massive difference in how much you'll have by the time you reach retirement age. To determine how much you should save to reach your personal retirement goal, you can use an online savings calculator to crunch how many years you have until retirement, your estimated rate of return and your retirement goal.

Using an 8.7% annual rate of return (the average for a retirement account that's evenly split between stocks and bonds, according to data from Vanguard), here's how much you'd need to save per month to reach $1 million by retirement:

How Much Do I Need to Save Every Month to Have $1 Million Before Retirement?
40 years until retirement$232
30 years until retirement$578
20 years until retirement$1,545
10 years until retirement$5,218

3. Make a Budget and Stick to It

Instead of waiting to see how much you can afford to save after you spend each month, build your budget around your savings.

When you start a budget with a major life event like retirement in mind, it's much easier to take an honest look at your spending to see where you might be able to cut back. Start by creating a bare-bones budget that includes just the necessities—housing, utilities, car payments and your food budget, for example.

Next, add in your savings goals and build your lifestyle around what's left. You might find that multiple streaming services, weekly fine dining or regular nail salon trips work against your goal of having $1 million by retirement, and that's OK. While you don't need to forgo all creature comforts to meet your goal, you'll likely have to make sacrifices if you want to make it to $1 million.

Once you set your budget, do your best to stick with it. If you find yourself tempted to overspend unnecessarily, weigh the immediate satisfaction of making a purchase against your goals for financial freedom in retirement. On the other hand, you might choose to rethink your retirement goals if you find your new budget too restrictive.

4. Eliminate High-Interest Credit Card Debt

While debt isn't a bad thing on its own, high-interest debt can inhibit your ability to build wealth. If you're carrying a balance on a credit card with an annual percentage rate (APR) higher than about 8%, one of the best investments you can make is paying it down ASAP. That's because it's unlikely any investment will pay returns as high as what you're paying your lender in interest.

If you prioritize eliminating this debt now, you'll save money on interest and have more to save for retirement in the long run. But that doesn't mean you shouldn't save anything until you've paid off your debt in full. Generally speaking, you should prioritize creating a basic emergency fund before putting extra income towards debt repayment. Otherwise, you could end up back in debt the next time there's an emergency.

But once you've ticked those boxes, prioritize paying down high-interest debt. You can also consolidate credit card debt with a low-APR personal loan, or use a balance transfer credit card with a 0% APR introductory period.

5. Consider a Side Gig

Thanks to today's bustling gig economy, there are more ways than ever to thrive making a bit of cash on the side. And if you're looking for ways to build your nest egg up to $1 million, picking up a side hustle and putting the extra income toward your retirement is a great way to pad your savings.

For example, driving for a ride-hailing service could be a flexible way to add money to your savings if you have a car. If you enjoy crafting, you could try listing your work for sale on Etsy. Flipping furniture, mowing lawns, walking dogs—the possibilities are nearly endless. You can also pick up freelance work that employs the skills you already use at work, such as coding or design. Stash your earnings in your retirement accounts.

6. Don't Tap Into Your Savings Early

While it may be tempting to tap into your 401(k) or IRA in a moment of financial hardship, dipping into your retirement account may have long-term financial drawbacks that can be severe.

Not only does withdrawing from your retirement savings early counteract your savings efforts, but steep early withdrawal penalties potentially make accessing your cash before retirement all the more destructive. If you cash out your funds from a 401(k) or traditional IRA before age 59½, you could face a 10% penalty. In addition, you'll also have to pay income taxes on the money you withdraw.

Avoid borrowing against your retirement by building an emergency fund. Aim for emergency savings to cover at least three to six months of necessary expenses.

Consistency Is Key

Reaching $1 million by retirement is a big goal that requires quite a bit of work. If you budget to live within your means, invest regularly and let compound interest work its magic, building a healthy retirement nest egg may be an attainable goal.

However long you have until retirement, now is the time to make a plan. If you need help determining which strategies are right for you and how to reach your goal, reach out to a financial planner for individualized advice.

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