Planning for retirement is never easy, but when the economy is struggling, it becomes even more complicated.
Money is tight for many Americans, and accumulating $1 million in savings from $100,000 may appear impossible. Fortunately, you do not need to be wealthy right now to retire a millionaire, and these four steps will set you on the right path.
1. Use The Stock Market
The simplest way to accumulate $1 million in savings is to save and invest. The stock market can be unsettling at times, but it can also help your money grow exponentially.
Historically, the S&P 500 has generated an average annual return of approximately 10%. In other words, the average annual return over many decades has been approximately 10% per year. Comparatively, bonds and other “safe” investments may only generate average annual returns between 3% and 4%.
Say, for instance, you have $100,000 in savings. If you earn an average annual return of 10% and do not make any additional contributions, it would take approximately 25 years for your money to grow to $1 million if you do nothing with it. With an annual return of 4%, it would take sixty years.
2. Start Retirement Savings Early
Time is your most valuable asset when it comes to accumulating a substantial nest egg for retirement. Due to compound earnings, the longer your investments have to grow, the greater your returns will be.
Suppose, for example, you have $100,000 saved for retirement and want to earn a total of $1,000,000 in order to retire comfortably. If you are earning an average annual return of 10%, you are doing well.
Each year is important, and delaying investment for even a few years could make it exponentially more difficult to reach your financial goal. Even if you can’t afford to invest much at the moment, you should start investing as soon as possible.
3. Invest In Right Places
Long-term investments with the potential for consistent growth are the optimal choice in general. Short-term stocks that promise to make you wealthy overnight are extremely risky and infrequently profitable. Long-term investments typically yield a slower rate of return, but there is a much lower risk of loss.
When uncertain, the S&P 500 index fund is one of the most reliable investments available. This investment seeks to replicate the performance of the S&P 500, so it contains the same stocks as the index and consists of the same stocks.
This investment has a long history of earning positive average returns and recovering from downturns, and it also requires minimal effort from your end. Simply invest on a consistent basis and give it as much time as possible to grow.
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4. Avoid Withdrawing Your Money
There are times when you have no choice but to use your retirement funds to cover an unforeseen expense. However, if at all possible, it is prudent to leave invested funds alone.
If you withdraw your savings before age 59 1/2 from a 401(k) or traditional IRA, you may be subject to a stiff penalty and income taxes. However, regardless of where you invest, withdrawing funds will make it more difficult to amass a $1 million nest egg.
Suppose you have $100,000 in savings, but you must withdraw $10,000 to cover an unforeseen expense. Assuming you earn a yearly average return of 10% and make no additional contributions to your investment account.
In other words, withdrawing $10,000 could cost you nearly $70,000 in potential earnings over the course of 20 years. And if you make repeated withdrawals, your savings could be impacted even further.
It is difficult to save $1 million for retirement, but it is possible with the right strategy. You will be well on your way to accumulating a million-dollar nest egg if you invest in the right places and give your funds ample time to grow.
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