How Millennials Can Retire With $1 Million

As a millennial, I am often lectured to about the importance of saving for retirement strategies. I’m often told horror stories about people heading into retirement with little or no savings, who subsist on canned cat food and dry beans.

It sounds like Chicken Little, yelling, “The sky is falling! The sky is falling!” But, these people may be right: according to a 2015 GAO study, about half of older workers and retirees don’t have any retirement savings at all!

Now, I don’t know about you, but I like to eat something other than rice and beans once in a while. I’d like to do fun things once I’m retired, like start up a big vegetable garden, and read lots of books. To do that, though, I’m going to need money saved up in the bank.

How much money will you need in retirement?

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How much money do you need to save up? Well, that depends. According to Keith Klein, a certified financial planner at Turning Pointe Wealth Management, you should plan to have enough money to withdraw about 4% per year. That’s what’s considered the safe withdrawal rate, or how much you can pull out each year without depleting the size of your nest egg in the long run (barring a big stock market crash, of course).

With a $1 million nest egg, that equates into a yearly income of $40,000. Would that be enough for you to live on?

I’d like to have a little bit more money in retirement, but that’s a good start. How can I get there?

Strategies to multiply your retirement savings

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Save using workplace retirement plans

If you’re lucky enough to have a workplace retirement plan such as a 401(k) or a 403(b), check to see if the employer offers matching funds. Each employer is different, but many will match contributions you make to your account up to a maximum percentage of your salary, usually 3-5%. My employer offers a very generous plan – they match my contributions up to 10% of my salary.

Always make sure you contribute enough to reach the maximum employer-matched contributions. It’s the only time you’ll ever see a guaranteed 100% return on your investment. The match goes a long ways towards helping you towards reaching $1 million.

How much more can you save with an employer match? Let’s look at me as an example. Right now I make $32,000/year, and I contribute 10% of that into my workplace retirement plan. Let’s assume that each year I’ll get a raise to match the pace of inflation (3%), but that I never get a raise above that (a sad prospect indeed). I’ve also already saved $8,000, and each year my investments should bring in about a 7% return on average. If I save this way until age 65, here’s what the final balance will look like at different employer match percentages:

Employer Match PercentageRetirement Account Balance At Age 65
None$840,652.78
1%$914,847.71
3%$1,063,237.57
10%$1,582,602.10

Giving up that employer match will clearly cost me a chunk of money.

Save using IRAs

Right now, I’m lucky to work for an employer who matches up to 10%, but I don’t know that I’ll always work for the same employer. What do I do if my future employer offers less of a matching percentage, or none at all?

If that’s the case, you should put contributions in a Roth IRA, according to Klein. The chances are good that right now, your income is lower than it will be at any other time in your life (except, maybe, for that job you had at McDonald’s as a teenager). Roth IRAs are beneficial because you pay taxes on the money going in now, but not when you take distributions in retirement. Hopefully, by the time you are in retirement, you’ll be in a higher income tax bracket, so it’s cheaper to pay the taxes now while you’re taxed at a lower rate.

You’re allowed to contribute $5,500 per year into a Roth IRA, so I wondered what would happen if I bumped up my retirement savings, and contributed the maximum each year into a Roth IRA? I ran the same scenario as above using the 10% employer matching I currently receive, but this time I saved an extra $5,500/year.

In this scenario, I would reach the $1 million mark by age 54, and if I continue working until 65, I could be looking at a balance of $2,458,958.00. Not a bad deal!

Start saving now

These numbers sound impressive, and they are. The key to getting these returns, though is to start saving now, because you currently have the amazing advantage of compound interest over a long period of time. That’s something you’ll never be able to get back.

It’s easy to delay saving for retirement. I understand the logic; you’ll be making more later on, anyway, so can’t you just catch up then?

I decided to test this scenario out as well. What would happen if I delayed saving for 10 years? Obviously, I hope I’ll be making more at that point in time, but it’s not guaranteed.

Here’s what happens if you postpone saving

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Over the span of 10 years, I would have contributed $36,684 of my own money into my workplace retirement plan, in addition to the $8,000 already in there. With a market return of 7% and employer matching of 10% added in, though, the account would be worth $120,731.

In 10 years’ time, I would have missed out on $84,047 of free money – and by the time the 10 year mark rolls around, I’ll only be earning $41,753.

I would have to contribute an entire two years’ worth of salary, before taxes even, to catch up. Wouldn’t you rather just take advantage of the free money now than have to work for years to catch up?

Balancing debt payoff and retirement savings

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Hopefully I’ve made a convincing case that you need to start saving for retirement now. But, sometimes, life doesn’t work out that way. Some people suggest saving as much as 15% of your income towards retirement, which is something I’m currently unable to do. I simply have too many loan payments, bills, and other living expenses, but still try to maximize my retirement savings.

I’m not alone, either. The average Credit Sesame member aged 25 – 34 has $21,636 in student loan debt, $10,778 in auto loan debt, and $2,768 in credit card debt. Obviously, it’s important to pay down debt too, but how do you balance the two priorities?

According to Klein, whether you should focus on paying down debt or increasing your retirement savings rate depends on your personal preferences. If the idea of being in debt keeps you awake at night, then you should allocate extra money towards your debt. Similarly, if being stuck eating cat food when you’re old is what keeps you up at night, then focus more on saving for retirement.

For me, I’m taking a balanced approach. Right now, I’m making the minimum payments on all of my debt, while also contributing 10% of my income to retirement savings. As I have more disposable income, I will be paying off debt first, because that’s what bothers me the most.

I figure that through this method, I’m still saving enough for retirement so that I can take advantage of compounding returns through my early years and still live a relatively comfortable life in retirement. For me, it’s all in the balance – what about you?

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Published April 22, 2016
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