When we think about retiring, it's nice to imagine doing so with a robust amount of savings. Many workers feel the same, which could explain why so many are making an effort to boost their nest eggs.
And those efforts are paying off. Investing giant Fidelity reports a record number of customers with $1 million or more in savings. Specifically, 180,000 Fidelity account holders had a balance of $1 million or higher in their 401(k)s as of the first quarter of 2019, while 168,100 had $1 million or more in their IRAs.
IMAGE SOURCE: GETTY IMAGES.
Now you may be thinking, "Well, sure, those people clearly reflect Fidelity's highest earners." But that's not necessarily the case. In fact, it's more than possible to retire with $1 million on a fairly modest income, provided you start early and invest your savings wisely.
How to save $1 million in your lifetime
Let's be clear: As a middle earner, you may not manage to amass $1 million by the time you turn 30, or 40, or even 50. But if you commit to building savings for your golden years, you could easily have that million by the time you retire.
The first step in the process involves saving from an early age -- ideally, as early as your first paycheck. Many workers, however, can't manage that, so if you've already missed the boat, worry not. As long as you're still relatively young, skipping a few years of savings shouldn't hurt your efforts too badly.
In fact, let's assume that you begin working full-time at age 22, but don't actually begin funding a nest egg until age 27. Let's also assume that you're looking to retire at 67, which, for anyone born in 1960 or later, constitutes full retirement age for Social Security purposes. Here's what your total savings balance might look like, depending on the amount you're able to sock away monthly over a 40-year period:
Monthly Savings Contribution
Total Accumulated Over 40 Years at an Average Annual 7% Return
TABLE AND CALCULATIONS BY AUTHOR.
As you can see, if you give yourself a full 40 years to save for retirement, you don't have to max out a 401(k), or even get close, to wind up with $1 million or more in savings. The average U.S. salary today is $46,641 a year, according to the Social Security Administration. Let's assume you commit to socking away 15% of that, which is the minimum most financial experts recommend (you'll usually hear that you should save 15% to 20% of your salary). Doing so would mean contributing about $583 a month to a retirement plan, which would leave you with somewhere close to $1.44 million as per the calculations above.
Of course, those calculations assume a 7% average yearly return on investment, and that's something we should talk about for a minute. That 7% is a few percentage points below the stock market's average. If you have a lengthy savings window, you should invest the bulk of your retirement savings in stocks for maximum growth.
Case in point: Contributing $600 a month to a retirement plan over 40 years means putting in $288,000 of your own money. But by applying an average yearly 7% return to those funds, we arrive at a total of $1.44 million. With a 4% return, which you might get from a bond-heavy portfolio, you'd end up with only $684,000. That's still a lot of money, but nowhere close to $1.44 million.
And there you have it: It is possible to retire with $1 million or more even as an average earner. You just need to be willing to commit to that goal early on, and invest wisely and consistently to make it happen.
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