(MP) Your millionaire next door neighbor has a fine home, lavish cars and a boat and you think, mine’s is nice too, yet the difference is he’s sitting on a million dollar nest egg. And you’re not! Now, he may have created a product or developed a business or maybe he got lucky with a get-rich-quick scheme. Yet, the reality is –to become a millionaire most people have to work hard and save for roughly 30 years.
So, if you want to reach retirement age with $1 million, it’ll take strong discipline and frugality. Those who start early saving money regularly have a higher chance of seeing fruition of a million dollar retirement fund. But even if you don’t have as much time, there are still options better than get-rich-schemes. By following a simple retirement investing plan maybe in 30 years, the millionaire next door could be you. So, what does it take?
Using compound interest
Compound interest has been called the eighth wonder of the world. “He who understands it, earns it; he who doesn’t, pays it,” is a quote widely attributed to Albert Einstein. I can not definitively say Einstein wrote this and Forbes certainly disagrees but, the math does speak for itself; At 7%, your money doubles every 10 years. If you continue to contribute roughly $300 per month into a fund every year, don’t withdraw money from it; let it stay in the market; After 34 years, it will grow into $1 million. This is the power of compound interest, your money reinvesting its own dividends and capital gains.
In-a-nutshell, you have to save money over time and invest it you’ll grow to be a millionaire. And, that’s where most of us falter. Many people, especially the young, think they have plenty of time to save money. It’s always this bill or that, this car note or home mortgage loan payment, the vacation or Aunt Margie’s wedding. What ends up happening is you never start retirement planning or saving at all. But this is not you. You’re serious about retiring a millionaire. So, whether you’re 25 or 45 or even 55, the 7% solution maybe for you. Assuming a 7% or 8% inflation-adjusted return from a portfolio of U.S. and international stocks, bonds and cash.
Millionaire next door retirement plan for 25 year olds
The power of compound interest says, if you begin investing at age 25, with a $10,000 investment, you’ll be a millionaire by age 60. Think about that for a minute. Say you earn about $40,000 per year, save 18 percent of your gross income, you could retire a millionaire. How? Just follow the 7% solution. Your annual salary provides you with an income of $3,333 per month before taxes. Set aside $10,000 and invest $300 per month (18 percent of your gross income). Invest that $10,000 along with $300 per month in a tax-advantaged retirement account, such as a 401(k) or an IRA. From there, select a passively managed index fund that tracks the Dow Jones industrial average (DJI).
You don’t have to do anything fancy like day trading or stock picking. You don’t have to flip houses or chase the latest business fad. You just track the overall stock market through a low-fee index fund that tracks the Dow Jones. This gives you access to the 30 of the biggest publicly traded companies in the U.S. Let money and time work for you.
Now imagine that you bumped your savings rate by another 2 percent. Now you’re saving $367 per month, instead of $300. This one move shaves two years off of your timeline. If you start investing at age 25, you’ll retire a millionaire at age 58 instead of 60. Yes, a mere $67 a month — the price of cable — can help you meet your goals two years earlier. That’s all thanks to the power of compound growth over time.
Special note: 35 year olds have to save $775 a month. Also see “Compound Interest Your Way to Wealth>”
Millionaire retirement plan for 45 year olds
There’s a greater sense of urgency if you start saving for retirement at age 45. The price of waiting will run you 5x more! Instead of investing $300 a month, you’re looking at saving $1,850 a month to turn that $10,000 into seven figures at a 7% annualized return. At 45, you’re probably deep in your career, with a good salary. You already own a home, and the kids are off to college. The good thing is you’re making money, because you’ll need to add $1,850 every month to that $10,000 base to reach $1 million in 20 years.
Millionaire next door retirement plan for 55 year olds
I won’t mince words here, at 55, your window for taking advantage of time and money is starting to close. Hopefully, you’re established and already have a nice income because you’ll need to take advantage of your peak earning years to top off your savings. What this means is you’ll have to step your game up a bit because you’ll need to invest $8,000 a month for 11 years, and that’s starting with a $50,000 bankroll. If you’re in the mid-50s and hugely behind, start focusing on lowering expenses by paying off debt, restructuring debt, or lowering housing costs. You may have cut expenses, save what you can, and work longer. This truth is you may not become a millionaire, but you can live like someone who is on the way to being one.
If you lower your expenses by $1,000 a month, by cutting that $12,000 a year from expenses equates to what roughly $175,000 in assets would produce at a 7% yield. That takes $1,000 off your savings needed of $8,000 leaving you a $7,000 per month bill. Add another $1,000 you get through your salary/wages, this leaves your retirement bill at $6,000 per month. Ge’ez, you still have a way to go…. Maybe you should take that $50,000 and start a website. Not one like this but, one that actually sells products. A good idea, a little marketing and maybe you’ll find the extra $7,000 per month quota necessary to meet your million dollar retirement. MoneyPacers believes in you!
Read: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, its the bible of becoming wealthy.
What can the average Joe/Jane do?
If saving a few hundred bucks a month seems unreachable, rest assured it will only get worse. One way to make retirement planning easier is to use your company’s 401(k) plan and take advantage of whatever contribution match your employer offers. Think of it as free money. Don’t have a 401(k)? Open a Roth IRA if you qualify, and automatically deposit money into it from your bank account. Roth plans offer you tax-free growth. However, with so little saved at this point, you would do well to reevaluate your expectations for retirement. Are you saving and investing accordingly? You may have to weigh the money your spending today versus a stable retirement.
But, don’t beat yourself up. Just save. Funnel money into your 401(k) so you’re not dipping into your own pocket for the full amount. Take the Roth IRA route if you can. By now you may have a young family — so do it for the kids. Show them you not only can make money, but also know how to handle it and maybe, just maybe, one day the “Millionaire next door will be you.”