Well, yes, you likely can. Unless you are aged 39 and 11 months and are not holding a winning lottery ticket. Otherwise, it will take some structure and commitment. And of course, you’ll need some earned income and a good rate of return. I think the real question being asked is how much do I need to put aside to save that amount? Is it going to overwhelm my monthly budget? As with all things money and finance, it depends.
Let’s set some assumptions. You’ve graduated college and entered the workforce and have already realized it’s not all that and you want to get yourself some financial freedom. Good for you! That’s your motivation. So how you reach your million dollar goal is a function of a few factors, namely, time, consistency, and rate of return.
You will need time on your side, consistency (i.e., sticking to your plan), and a decent return rate. The better the return, and the more you can contribute, the shorter your time to reach that goal. Let’s setup a challenging example.
Alice is a recent college grad who finished her degree and entered the workforce by age 22. Very ambitious! For Alice to hit $1,000,000 by age 40 (just 18 short years) she would need to save $2,696.38 per month and earn an annual return of at least 6%. Wow! Seems like a lot, but is it? Let’s look deeper.
Suppose Alice’s employer has a 401(k) plan and she participates in the plan. Let’s further assume she is receiving a match of up to 5% of her compensation up to $3,000. In other words, Alice’s employer’s match caps at $3,000. If Alice is earning $75,000 per year, and contributing 10% to her plan, she’s making roughly $875 in monthly contributions (her part, plus the match). Now she only needs to save an additional $1,821 per month. Assume she’s a California resident. That would be roughly half of her net monthly salary after accounting for state and federal taxes. Alice would be netting roughly $1,883 every two weeks. Ouch, that’s tight! However, that figure is becoming more manageable. It’s still A LOT to save, but suppose Alice receives an annual bonus, cha-ching! That’s more she can pop into savings. Alice can also use tax refund money, gift money, or any other mini windfall she receives to boost her savings and reach her goal sooner. If Alice is in a co-housing situation, married, or has any other extra income, her goal is still challenging, but becoming more within reach.
Alice can increase her chance of reaching her million dollar goal in a few ways. She can increase her timeline to say, age 45, instead of 40. She can also increase her exposure to equities in her 401(k) and in her personal brokerage account. For example, the S&P 500 has averaged annual returns of between 8% and 12% historically, depending on the source referenced. Taking on a little higher risk at a young age can help Alice reach her goal. Earning an average of 8% per year means she only needs to save about $2,200 per month. At 9%, only $1,950 per month. If she extends her goal to age 45 and earns 8%, she only needs to save $1,369 per month.
As you can see, time invested, rate of return, and consistency are all important factors. There are a lot of investment millionaires out there. Most are not what would be described as high-earners; rather, they are diligent savers. You can save a million over time with consistency and a plan. By the way, if Alice only saved $1,000 per month starting at age 22 and decided to leave the workforce at say, age 55, and earned 9%, she would have approximately $1,420,835. Not bad!
For most of us, we should be saving at least 15% minimum, and up to 20%, of our annual lifetime earnings. Over the course of a so-called normal working career, say 30 years, this amount saved should provide a comfortable retirement. You can see last week’s post for how much you need for retirement. Maybe the question shouldn’t be can I save a million dollars, but rather, how do I save a million dollars?
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