How to get anything but a millionaire’s pension | Smart Change: Personal Finance

(Christy Bieber)

Becoming a millionaire may seem like a fantasy if you work hard to pay the bills. But the good news is, you don’t need a huge paycheck or a winning lottery ticket to collect a seven-figure nest egg by the time you reach retirement age.

In fact, by following just four simple steps, you should be able to save at least $1 million to help you in your later years. Here’s what those steps are.

Image source: Getty Images.

1. Start investing early

It’s much easier to save $1 million if compound growth helps make it happen. When you start investing, the money you have contributed to your account starts to yield returns. Those proceeds can be reinvested. When that happens, your account balance grows without further intervention from you.

The sooner you start investing, the more your returns can multiply over time and your balance can grow. For example, say you invest $100 and get a 10% return. By the end of the year you would have made $10 and have $110. If you made the same 10% return the following year, you would make $11 in profit instead of $10 because your return would also make money for you.

Compound growth is powerful. If you start investing at age 20 and take advantage of 45 years of compounding, you could get a $1 million nest egg by contributing just $115.91 per month to your account (if you have an average annual return of 10 % earned). But if you waited until age 40 and only had 25 years of growth, you’d have to contribute $847.33 a month to collect $1 million.

Obviously you can’t go back in time and start investing at age 20 if you are already past that age. But if you want to save $1 million, start working toward that goal ASAP.

2. Calculate how much to invest each month

Breaking down big goals into small ones is the easiest way to achieve them. So start from the premise that you want to save $1 million by a specific age, such as 65. Then break down this big goal by determining how much you need to invest each month to reach your goal.

Investor.gov has a savings goal calculator that helps you calculate the required monthly contributions based on the expected return and the date you want your $1 million to be available.

3. Automate contributions to retirement accounts

If you want to make sure you reach your savings goal, you need to be consistent in investing your target amount. The best way to do that is to make the process automatic, so you don’t have to manually make the investment decision each month.

Having 401(k) contributions deducted directly from your paycheck or transferring the required amount directly from your bank to your brokerage firm each day you are paid maximizes your chances of sticking to your plan to retiree become a millionaire. You’re much less likely to miss a month of savings if this happens without your intervention.

4. Build a diversified portfolio

Finally, you want to make sure you are investing in a good mix of different assets that will limit your risk while still giving you the opportunity to earn a reasonable return. If you’re good at stock picking, you can build your own diversified portfolio by spreading your money and buying stocks in companies across many industries.

If you don’t know how to choose a good mix of different investments, diversification is easier with ETFs. You can select an exchange-traded fund that gives you exposure to 500 of the largest US companies in all different fields by buying an S&P 500 index fund. Or you can buy several ETFs, including one that invests in small companies, another in large companies, a third in bond funds, a fourth in real estate, and a fifth in emerging markets.

By following these four steps, you can ensure that you are investing enough and earning generous enough returns that becoming a retired millionaire is easily within your reach.

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