3 Move to make sure you are a retirement multi-millionaire

It is entirely possible for a typical nine to five employee to retire a multi-millionaire – and you may have to be there if you want to have enough savings to survive several decades. It’s not always an easy thing to accomplish, but there are a few things you can do to get yourself on the right track. Here are three strategies to keep in mind if you want to retire with $ 2 million or more.

1. Save as much as you can for retirement each year

Obviously, the more you can retire each year for retirement, the easier it will be to hit your multi-million dollar savings goal. This is especially true for those who start saving while they are young, as these early donations have the most time to increase in value before you need to use them.

Elderly couple sitting on a sailing boat with wife marking the horizon

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Consider a $ 1,000 donation made when you are 25. If you earned an average annual return rate of 7%, that $ 1,000 was worth nearly $ 15,000 by the time you were 65. But if you waiting until you were 30 to deposit that $ 1,000 into your retirement account was only worth about $ 10,700 before you reach 65. Those five additional years of growth add up to around for an additional $ 4,300. And the more you add, the more time will work in your favor.

If you can afford it, the fastest way to achieve retirement multi-millionaire status is to increase your retirement accounts every year. In 2020 and 2021, that means adding $ 19,500 to your 401 (k), or $ 26,000 if you are 50 or older. You can also contribute up to $ 6,000 to an IRA, or $ 7,000 if you are 50 or older. But don’t go above those limits, or you could run into tax penalties that put you back.

2. Select the correct retirement accounts

As mentioned above, some retirement accounts allow you to do more than others, but that’s not the only difference to keep in mind when deciding where whether you send your savings. One reason 401 (k) s is so popular is that many employers match a portion of their employees ’contributions, which helps employees to accelerate their savings. But 401 (k) s usually don’t have many investment options compared to IRAs, so if you don’t like your options, you may be better off saving in IRA first and return to your 401 (k) immediately after hitting the IRA donation allowance.

You also need to stress when you want to pay taxes on your savings. Tax-deductible accounts, like most traditional 401 (k) s and IRAs, are the quickest option if you think you’re in higher tax brackets today than you will be in when you retire. Tax delays so that you are in lower brackets will help keep you on top of more of your savings. But that also means that not all of the money in those retirement accounts belongs to you. So if you only save in taxed accounts and think you need $ 2 million to retire, you may need to save even more, so there is enough to give the government its share.

Roth’s retirement accounts allow you to withdraw tax-free money after paying taxes on your contributions. One of these is the best option for you if you think you are earning about the same or a little less than what you spend each year when you retire. Paying taxes now on just your contributions will be more affordable than paying taxes on your contributions and earnings later. In addition, all the money in these accounts is yours, as long as you have the account for at least five years before you withdraw your assets and do not withdraw money before age 59 1/2.

3. Don’t be too conservative with your investments

In uncertain financial times like these, safer, more stable investments like bonds look more attractive than volatile, but potentially more profitable stocks. It is a good idea to have some of your money in stocks and some in bonds at all ages, but the ratio should change over time.

When you are younger, you should keep more of your money in stocks to take advantage of their growth potential. You may lose money in the short term, but since you have decades to get those money back before you have to spend them, the loss is not so great. As you age, keeping what you have becomes more important than big gambling on stocks, so you should transfer more of your money to bonds.

The dangers of being too aggressive are obvious, but being too conservative can also be difficult as your savings become slower. That will require you to set aside more money each month to reach your goal, and if you can’t do that, you may not get there at all. It is best to maintain an appropriate balance of stocks and bonds for your age and risk tolerance.

The traditional rule was that the percentage of your portfolio that you should invest in stocks was 100 regardless of age. So if you are 60, you should keep 40% of your money in stocks. But with people living longer these days, 110 or 120 minus your age is more appropriate. In addition to diversification, this will help protect your savings without spending much of your potential investment income.

These rules are useful to keep in mind even if you are not trying to save $ 2 million or more for retirement. But targeting this number isn’t a bad thing, even if you don’t think you need so many. Costs of living only rise over time, and you can never predict all the costs that will come up after retirement. It is always better to save too much than not enough. If you don’t use it fully, you can give the rest to your heirs.