How to Save $1 Million

[Lubaolong]

The Wall Street Journal Online
By Jonathan Clements

If you're a newly minted college graduate, the $1 million-plus needed for retirement might seem impossibly large.

Feeling discouraged? Try lowering your sights, aiming instead to accumulate savings equal to two times your annual income.

Once you hit that milestone, the financial wind will be at your back -- and reaching your retirement-savings goal should be a breeze.

Breaking through. Suppose you expect eventually to earn $80,000 a year. Looking ahead to retirement, you reckon that -- in addition to Social Security -- you will want maybe $45,000 a year from your portfolio, adjusted for inflation.

To generate that $45,000, you will need a $1 million nest egg, calculated in today's dollars. This assumes that, in retirement, you use a 4.5% annual portfolio-withdrawal rate.

Investment Growth

"People wonder how they will ever accumulate enough money," says Charles Farrell, a financial adviser with Denver's Northstar Investment Advisors. "But what many investors fail to understand is that, once they reach a certain level of assets, most of the savings should come from investment growth."

Mr. Farrell figures the breakthrough occurs at around two times income. Let's say your salary has hit that $80,000, you have amassed $160,000 in savings, you are socking away 12% of your pretax income each month and your investments earn 6% a year.

Over the next 12 months, your $160,000 portfolio would balloon to $179,518, or $19,518 more. Your monthly savings would account for $9,600 of that growth. But the other $9,918 would come from investment gains. In other words, you've got to the crossover point, where the biggest driver of your portfolio's growth is now investment earnings, not the actual dollars you're socking away.

You should, however, keep salting away money. That sacrifice will be handsomely rewarded, as things really start to snowball. Using the assumptions above, your portfolio would soar from $160,000 to more than $418,000 a decade later. True, part of this gain would be lost to inflation. But inflation should also drive up your salary, allowing you to squirrel away more money.

Get Started Now

Getting started. That still leaves the initial task of accumulating two times income.

"It can take people 12 to 15 years," Mr. Farrell says. "The earlier you can start, the better. But if you're close to two times pay by your early 40s, you're probably in pretty good shape."

As you strive to amass that sum, your top priority should be funding your employer's 401(k) plan. In addition to the initial tax deduction and continuing tax deferral, you will likely receive a matching employer contribution, which will help speed your portfolio's progress.

If you can, save outside your employer's plan, by funding a Roth individual retirement account. That won't get you an initial tax deduction, but you will enjoy tax-free growth. A Roth also offers a heap of flexibility. At any time, you can withdraw your contributions -- but not the account's investment earnings -- without any sort of tax hit. That means your Roth could double as an emergency reserve or as your house down-payment fund.

Investment Ideas

Which investments should you buy? Check out broadly diversified no-load funds like AARP Aggressive and Schwab Target 2040, both of which require a $100 initial investment. Until you reach Schwab's $1,000 brokerage-account minimum, you will need to add $100 every month through an automatic investment plan, where money is pulled out of your bank account and invested directly in the fund.

Also consider Fidelity Freedom 2050 and T. Rowe Price Retirement 2050. The regular minimum at both funds is $2,500. T. Rowe Price will trim that minimum to $1,000 if you open an IRA and waive the minimum entirely if you sign up for a $50-a-month automatic-investment plan. Similarly, at Fidelity Freedom 2050, you can sidestep the minimum if you agree to invest $200 a month through Fidelity's SimpleStart IRA program.

[Octavian]

classic... not one response till this



on a side note... recent college grads will need to save more than a mil to graduate, quite a bit more from what I've read



contribute to your Roth every year and seeks a fund that typically returns 12-15% and you will put together a nice bunch of cash... but that's IF the market survives well because from 1999 to 2002/3 almost all mutual funds were getting wrecked with negative net returns

[Te(V)plar]

Fuck, Id love to invest money. However, pursuing a medical career, I likely wont have a dime to my name until I'm in my 30s. The sooner you invest in a Roth the better, but I dont think I'm in a position to be able to do that.

[Octavian]

Originally Posted by Te(V)plar

Fuck, Id love to invest money. However, pursuing a medical career, I likely wont have a dime to my name until I'm in my 30s. The sooner you invest in a Roth the better, but I dont think I'm in a position to be able to do that.

compound interest my friend... it makes a big difference over the span of 30 years.

try your hardest to contribute to one even if it's only something like $1,500.


if you contributed the max per year (4k) for about 30 years into a 12-15% yearly fund... you'd have WELL more than a mil.. in fact, last time I look at a spread sheet about it, (without doing any math here) you'd have around 3 mil.

[Mithra]

Good article...everyone who has a "normal" career should do this.

Everyone should read and understand it.

[chokingvictim]

This is an excellent post. Many people believe that their first priority should be saving for a home, or paying off debt before starting a retirement account. But putting away money in a traditional or Roth IRA is an excellent idea even before you've paid off all your debts from school if you went to college.

Some things I would add: well-diversified portfolios are fine, but when you're still young, investing in a small-cap index fund is a better idea (not for all of your portfolio, but some say to take the number of years you have until retirement, and subtract that number from 100, and that's the % you should invest in small-cap stocks). As you get closer to retirement, taking more % of your savings away from the small-cap stocks and investing more in large-cap or bond funds (lower returns but less volatility) is good. When you have 30 years or more until retirement, a small-cap index fund will have higher returns. It will be very volatile, but it doesn't matter because you shouldn't be planning to touch it for a long time anyways. There are some exchange traded funds that track the S&P 600, I think the ticker is IJR/IJS (i-shares). Also Vanguard has a fund that tracks the Russell 2000 index.
Index funds have less fees than actively managed funds, and Vanguard tends to have the lowest fees around.
There are financial calculations you can do on many websites, that will show you just how large the difference is between investing a small amount starting at a young age, and how much you'd have to invest if you wait until you're 35 or 40 to catch up.

[johndredd05]

i think articles like this are absurd. if you want to live at half your salary now 40 years from now your going to need to save a hell of alot more than a million. Whatever you make return wise inflation will be blasting away 3% a year. In a 401 you havent paid the tax man yet. Your not going to do that in 40 years with 401 contributions, either getting the market return or with some douche fund manager who cant ever beat the index. 40 years of the biggest bullmarket ever and we are at 10% a year if you grab the market return. if you want a lavish retirement i think you will need to learn to invest/speculate on your own ouside the retirement account and learn to beat the index.

[Eric O]

I'd rather take that money and invest it in making my buisness larger. I know ppl that are obsessed with retireing. They put all their money away pinching every penny preaching about how they'll retire at 50.

That's nice, when their old and their back hurts they can retire into an old folks community and drive a colf cart around. When I'm 50 I'll be remembering about how I went on tons of trips around the world, drove a porsche and tons of other cool cars, had motorcycles, snow mobiles, atvs and enjoyed my life.

[chokingvictim]

Originally Posted by johndredd05

i think articles like this are absurd. if you want to live at half your salary now 40 years from now your going to need to save a hell of alot more than a million. Whatever you make return wise inflation will be blasting away 3% a year. In a 401 you havent paid the tax man yet. Your not going to do that in 40 years with 401 contributions, either getting the market return or with some douche fund manager who cant ever beat the index. 40 years of the biggest bullmarket ever and we are at 10% a year if you grab the market return. if you want a lavish retirement i think you will need to learn to invest/speculate on your own ouside the retirement account and learn to beat the index.

Most people probably don't have the time to learn these things outside of their job, and many people just aren't intelligent enough to learn some of the concepts.
Also, many fund managers don't beat the market, and even fewer are able to find high-risk investments and consistently do well.
I noticed you posted something about your mini-futures system working out. That's great, but most people can't consistently do well with stocks and bonds, let alone derivatives. Wasn't there a guy who believed people could use his system to do well trading put and call options, and he trained 10 guys and gave them each $1 million, and quickly every one of them lost it all but one. I can't remember his name, but the market behaves irrationally and since all information is public, finding inefficiencies to take advantage of is difficult even for an expert. I know what you're saying but I wouldn't recommend against investing in low-cost index funds. I think for most people, they are a good way to invest some of their retirement money.

[Te(V)plar]

Originally Posted by Octavian

compound interest my friend... it makes a big difference over the span of 30 years.

try your hardest to contribute to one even if it's only something like $1,500.


if you contributed the max per year (4k) for about 30 years into a 12-15% yearly fund... you'd have WELL more than a mil.. in fact, last time I look at a spread sheet about it, (without doing any math here) you'd have around 3 mil.

I realize this and that is why it's killing me. I'm staring down the barrel of 50k a year in tuition. Being able to squirrel away 4k a year when I have no income seems practically impossible.