One day, when I was in my late 20s and starting a job at a major newspaper chain, the treasurer pulled me into his office to explain what I‘d be missing if I failed to join the company‘s 401k plan — something totally foreign to me at the time.
The company was matching 50 percent of whatever part of my earnings I was willing to put into the retirement savings program, up to 6 percent of my total pretax paycheck, with taxes coming out at retirement.
“There is no better investment in the world,“ said the treasurer. “You‘re being guaranteed a 50 percent return on whatever you decide to invest, up to 6 percent of salary, with each and every paycheck. You will never get a better deal anywhere — ever.”
And it‘s true: Putting away as much of your salary as you can each pay period and maxing out your 401k plan is the first critical step toward saving $1 million or more for retirement, said Leon LaBrecque, CEO of LJPR, a fee-only financial advisor and wealth management firm based in Troy, Mich.
LaBrecque has helped some clients save well over $1 million for their futures and believes he has found a solid formula for wealth accumulation: Simply save a larger percentage of income.
LaBrecque recalled how one client approached him in the early 1980s and said, “Just give me something simple to do.” LaBrecque responded, “Save 18.7 percent of your money in the Vanguard Windsor Fund.” In 20 years, the client had amassed a whopping $2.5 million.
The client, who had all of his Vanguard statements stacked up unopened, was happily surprised. “I’ve been on the 18.7 percent solution ever since,” said LaBrecque, who noted that the figure includes employer contributions. “So, if your employer matches 5 percent, your job is to save just 13.7 percent.”
An individual making $50,000 a year and investing 18.7 percent of her salary for 30 years with an 8 percent rate of return would have a $1 million nest egg, and be able to withdraw around $40,000 a year with a low risk of running out of money during retirement.
You might ask yourself, “Do I really need $1 million in retirement savings?” The answer depends on your lifestyle, and whether you want to maintain that lifestyle in retirement. How much of your current income do you hope to replace a few decades down the road? In many cases, you might need $1 million or more in retirement savings.
Getting there is doable if you start early enough, know how you much to put away and understand how to withdraw funds in a disciplined fashion, according to financial advisors.
“If you are living in a metropolitan center [and] are middle class making at least $75,000 per spouse, you probably need $1 million or more,” said Todd Rustman, a certified financial planner and founder of Clarity Capital Partners in Newport Beach, Calif.
Following are five steps you can take to get closer to that magic $1 million.
Go to your benefits director and find out how much your employer will match in your 401k or other retirement savings plan, Rustman said. Then, put as much money into the 401k plan as you can to earn the maximum match.
LaBrecque agreed that it is foolish to pass up the match. “Free money is free money,” he said. “And the match is free money.”
If you get a 2 percent raise, increase your 401k contributions by 1 percent, LaBrecque said. Keep doing this with every raise you get. “Don’t just increase the sum you put into the plan, but increase your percentage contribution as well,” he said.
Sometimes, the stock market experiences a downturn, causing some investors to panic and immediately sell their stocks. However, dumping your stocks can be a huge mistake.
“Don’t quit. Don’t stop,” said LaBrecque. “I’ve seen people stop their 401k in down markets. Awful idea. Down markets are sales. We buy steak on sale and clothes on sale. Make investments on sale.”
In other words, a down market is a chance to buy at a discount. Also, remember that saving for retirement is a long-term process. Eventually, the stock market will recover — and so will your investments.
Next year, don’t splurge your tax refund on a flat-screen TV, a new pair of shoes or a last-minute vacation. Instead, invest your tax refund in some type of savings or retirement account to help you reach the $1 million goal.
“I see folks who claim they can’t save for retirement, yet get a $2,600 refund,” said LaBrecque.
According to the IRS website, direct deposit is the “best and fastest way” to get your tax refund. Plus, this option can help you resist the urge to spend your tax refund on nonessentials. You even have the option to split your refund into two or three additional financial accounts — including an IRA.
Rustman suggested taking classes, earning an MBA or doing whatever you can do to increase your value as a professional. You’ll earn more — and be able to invest more. You might not even have to pay for the classes out of your own pocket. Ask your employer and human resources department if your job can foot the bill for the classes.