5 Tips to Help You Retire With $1 Million
$1 million. Sounds like an awful lot of money. In fact, not so many years ago, the thought of a 7 figure payday would have had most of us salivating. But times change. Sure, it\'s still a lot of money but in the grand scheme of things it\'s still a pretty small drop in the ocean. Now, how do you go about getting your hands on that drop in time for a comfortable retirement?
Start Saving Young
Really young! It might seem like a no-brainer but the earlier you can start putting something aside the better. Ideally, you want to be earning the national average salary in order to be comfortable but this may not always be possible.
You\'ll also need to get the best returns on your savings. Assuming an average return of 7%, you\'ll be able to amass $1 million in 40 years (based on savings of just under $5,000 per year). If this figure is not one you can afford from the word go - don\'t worry. Even the smallest sum you can put away is better than nothing. It\'s also good practice that will help you get into a routine of regular saving.
Keep Investment Fees Down
401(k) contributions are an exceptionally safe way of building up a large retirement fund. But the fees can hit you - hard. Like the regular savings example above, let\'s assume an annual return of 7% with fees. Now let\'s keep our expenses low at about 0.5%. Putting away less than $7,800 a year will see you hitting the magic million in 35 years.
But what if your fees go up? By even half one percent? Well, in order to save the same $1 million in the same timeframe you\'ll need to add nearly $2,000 more to your annual savings figure. By selecting only low-cost investments you\'ll ensure that you keep more of your money in your savings instead of paying it out to the taxman.
A 401(k) match is a great way of giving your savings efforts a shunt into the fast lane. Getting a match of $1,500 means you\'ll only need to save $5,500 every year to hit a seven figure jackpot in 35 years. Obviously, there\'s a cap on how you can invest in your 401(k) but that doesn\'t mean you can invest the $1,500 somewhere else.
Be aware of any limitation or clauses that may apply to any employer matching scheme. In some cases, you may not be eligible to claim your match until they have employed you for a number of years.
Avoid Payment Gaps
Times are tough right now. Even if you have an unbroken employment record it can still be hard to save on a regular basis. Moving from one job to another may mean you\'re forced to wait until you join a 401(k) plan. Taking time off due to illness or family problems can drastically slow your savings efforts. That\'s why you need to keep saving.
It may sound like a crazy idea but you should be saving even when times are tough. Going back to my first point, even $100 a month is better than nothing. Then, once things pick up and you\'re earning again you can push all the money you banked into a new retirement plan.
Don\'t Dip Into Your Funds
Apart from actually saving enough money, the biggest obstacle to making a million is you. Dipping into your 401(k) will drastically slow your efforts. Not only will you be spending money that you should be saving but you\'ll also be hit in a number of other areas. Generally, an early withdrawal penalty of 10% will be levied on you. You\'ll also be hit with a tax-based penalty which is based on the tax bracket you are caught in.
A quick example: drawing out even a modest $10,000 will result in you being hit with over $3,500 in fees and penalties. Ideally, you should also have an emergency fund to cover any eventualities and ensure you don\'t dip into your retirement funds.
5 relatively simple tips to help you hit the magic $1 million by the time you retire. It\'s not always easy and given that we\'re facing a fiscal cliff these pieces of advice might seem like a waste of time. But, the thing is, the economy will pick up. The good times will return. Do you want to risk being left out in the cold without two pennies to rub together?
Written by James Redden
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Last update: 03 January 2013
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