You don't need to be rich or luck into an inheritance to become a millionaire in your retirement years. The only things you need are a miniscule portion of your paycheck, a level head and patience.
The most important thing you can do for your future is invest as early as possible. Getting started may be daunting, particularly if your company doesn’t offer a 401(k) plan that you can opt in to, or you freelance and lack that retirement contribution option. Don’t fret. Anyone can contribute to an IRA, and it’s simple and cheap to open one online through services like investment management companies like Vanguard. Decide on a plan based on how many years you have until retirement, how much risk you want to take and whether you want to make specific decisions for your portfolio of investments. Typically, it only takes $1,000 to start an IRA and begin making contributions.
If an investor contributes just 10% of her salary a year, beginning at age 25 with a starting salary of $50,000, she will have socked away $916,618 by the time she retires at 65.
Say she starts contributing when she’s 35, with the same $50,000 salary. While she only waited a mere 10 years later to invest, she’ll only have $483,152 by age 65. If she starts at age 55, the returns are even bleaker. She’ll only save $88,471 for her golden years.
Bear in mind the big difference between merely saving money for retirement and investing it for your leisure years. In a savings or checking account, the rate of return your money will generate is minimal, particularly with the ultra-low interest rates we’re now experiencing. Investing your money in a 401(k) or an IRA whose portfolios blend equities and bonds can generally produce 5% to 7% returns per year. Depending on the type of retirement plan you choose, you’ll enjoy tax breaks and other benefits to boot.
If you’re employed at a company that offers a 401(k) match, do everything in your power to invest up to that match—at the very least. It’s the closest thing to free money you’ll find—money that will generate healthy returns no less!
401(k) plans typically offer an average of 19 investment options, and it’s the investor’s job to choose a portfolio of equities and bonds that accommodates his risk tolerance. By reviewing your 401(k) at least once a year, you can keep your asset allocation (how your investments are distributed across stocks, bonds and money market securities) balanced. When choosing where to allocate your investments, it’s important to remember that high management fees can cut into your returns if you’re not careful. Choosing your investments will help you avoid excessive costs; index funds, for instance, have low management fees and provide broad market exposure. Be sure to automate your contributions so that you’re not tempted to spend money earmarked for retirement.
And find out whether or not your plan offers the option to make Roth 401(k) contributions as well. While traditional 401(k)s give you a tax break for the years you contribute to it, you’re taxed when you take your distributions in retirement (at which point you’ll find yourself in a higher tax bracket). Roth 401(k)s use after-tax money to make contributions so that when you claim these funds in retirement they’re tax-free.
If your employer doesn’t offer a 401(k) plan, you can contribute to a Roth IRA or a traditional IRA, which are similar in most respects except for their tax treatment. In an IRA, like a 401(k), investors can automate their contributions and decide what to invest in.
One final note of caution: Your employer can’t match your contributions to an IRA, and the maximum yearly contributions allowed for an IRA are much lower than the 401(k)’s contribution limits: $5,500 for an IRA instead of $17,500 for a 401(k). If you have the chance and the means, contribute to both a traditional or Roth IRA and a 401(k)—using both is a great way to put away as much as possible for retirement.
