News flash: You don’t need a huge salary to retire a multimillionaire. Don’t get me wrong — amassing a $2 million nest egg isn’t easy. If it were, everyone would be living the good life in retirement. But saving up an impressive nest egg is possible, and I’m going to tell you how.
First, know that you’ll have to forgo some indulgences in your working life. This doesn’t mean you can’t eat out or subscribe to Netflix. But you will spend more conservatively than most people you know. And you might need extra resolve to listen politely to friends’ stories of new cars, kitchen remodels, and tropical vacations.
The good news is that these roles will switch later in life. Stick to your wealth plan and you’ll be living your best life in retirement. And the friends who were less disciplined about saving will likely have less freedom and security.
If you can accept a more conservative lifestyle today for a richer one tomorrow, then let’s get into the details of how to retire with $2 million on a $60,000 salary.
1. Contribute twice as much as everyone else
According to a study by Fidelity Investments, the average total contribution rate in workplace retirement accounts was 13.9% in 2021. That total includes the employee’s paycheck deferrals plus employer matching contributions.
On your $60,000 salary, a 13.9% contribution equates to $8,340 annually or $695 monthly. That’s a good contribution level, but it won’t get you to the $2 million target. You must do more than the average — specifically, you must double it.
This is easier when you have employer match to help you out. If you don’t have employer match, the onus is on you to save the full 27.8% of your salary. If that feels impossible, create a budget to identify the maximum you can save. Something is better than nothing. And you can always raise your contributions later.
2. Invest in the market
Investing $1,395 monthly for most of your career should carry you to a $2 million nest egg. This assumes your investments grow in line with the stock market’s historic annual average of 7% after inflation. It’s reasonable to expect this return rate long-term from a broad market index fund, like the Vanguard 500 Index Fund (NYSEMKT: VOO).
To avoid extreme volatility, pair your equity index fund with a fixed-income fund that’s more stable. If you’re young, you might invest 10% of your contribution in fixed income. As you near retirement, gradually raise that percentage.
3. Don’t overthink the timeline
According to a compound interest calculator (like this one), you’ll reach the $2 million mark in about 33 years under the assumptions above.
Three decades is a long time to wait. It’s so long that you can easily get discouraged and give up — or not even start. You’ll have to resist that line of thinking. Instead, focus on making your retirement contributions a habit. Commit to investing your $1,395 (or whatever amount) each month, no matter what.
4. Check in, but not too often
In the early years of this plan, it can be a mistake to check your account balance too often. Your wealth momentum takes time to build — especially when the market’s going through a rough patch. If you expect to see immediate results, you may be disappointed.
Checking in once or twice a year should be sufficient in the beginning. At those check-ins, compare your investment performance to the market average in the same period. If you’re in a broad index fund, your returns should be similar to the market’s returns. Any underperformance is likely related to high fund fees or high account fees.
High fees can be problematic in 401(k)s, especially if you work for a small company. You can move some of your investing to another account where the fees are lower — but only do this after you’ve maxed out your employer match.
You should also double-check your asset mix regularly. As your equity fund grows in value, it will comprise an increasing percentage of your balance. The larger that percentage gets, the more volatility you’ll see in your account. You may need to adjust periodically, by selling some of your equity fund and using it to buy more of your fixed-income fund.
This way to a $2 million retirement
The road to a $2 million retirement is long, but it’s not super complicated. Invest a sizable percentage of your salary in the stock market monthly for the foreseeable future. Check in on your progress occasionally in the early years, and more often later. And keep the faith that you’ll be rewarded amply for your efforts.
If your motivation to stick with your plan wanes, picture the retirement you want. See yourself living comfortably in your work-free years — enjoying the great life you’ve created.
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