Since 2020, the amount Americans think they need to retire has increased 50% – from $1 million to $1.5 million. That figure is expected to continue rising and soon surpass $2 million. For many families, even those earning more than $100,000 annually, the dream of saving $2 million may seem ambitious. Young parents often find it hard to balance their monthly mortgage, student loan repayments, and saving for college with retirement planning. However, with the right strategies and discipline, the goal to reach to $2 million in assets is more attainable than ever.
Starting earlier is better due to the power of compounding. But here at Magellan Financial Group in Allentown, we often work with clients who only get serious about their long-term goals in their 40s or even 50s. Regardless of your age, we believe in empowering families to achieve their financial hopes and dreams. This guide provides a comprehensive roadmap to help you save $2 million, breaking down the process into manageable steps.
Understanding Saving and Investing Basics
Compound interest is the marvel in the world of finance! It’s the interest on your initial principal, plus the accumulated interest from previous periods. And the earlier you start, the more you benefit. Let’s take an example (per the chart below): If at 25, you start saving $833 a month with an average return of 6.5% annually, by 65, you’ll have approximately $1.9 million. If you start at 35, however, with the same conditions, you’ll only have around half that amount by age 65. Starting at age 45? You must save over $4,000 a month to meet your $2 million goal by age 65, work longer, or both.
Time is on your side, and putting a little bit away now will pay dividends in the long run. But what if you’re among the 66% of Americans who worry they’ve started saving too late to have as comfortable a retirement as they envision? Kiplinger identifies 5 key steps to take to help you catch up:
- Take Advantage of Employee Benefits – the potential tax savings alone should make accounts such as 401(k)s your starting point
- Increase Savings 1% – immediately increase your savings rate by 1%. Your next raise or promotion, increase by another 1%. You didn’t need the money for expenses before the raise, and you probably don’t need it now
- Convert Savings to a Roth – since this is a taxable event, try to time the conversion during a down-income year or over multiple years to minimize the potential tax impact
- Consider Where You’ll Retire – every state has a different cost-of-living and taxes retirement income from 0% to a considerable amount. If you’re behind, you may have to pivot on where you plan to settle down in your golden years
- Make Catch-Up Contributions – starting at age 50, the amount you get put into your 401(k) and IRA increases dramatically. Take advantage of the opportunity!
If this sounds like a lot to consider, you’re not alone. Even financially savvy working professionals can find budgeting, prioritizing, and setting realistic financial goals to be a challenge. Schedule an appointment with a wealth advisor to review your unique situation and aspirations, and to put a practical action plan in place to help direct you toward where you want to be.
4 Strategies To Optimize for Success
Regardless of how far along you are in your financial journey, we’ve identified 4 strategies you will want to optimize to increase your odds of making it to the $2 million goal. Whether you’re 25 or 55, each consideration is essential to giving you the best chance to attain the comfortable retirement you envision.
1. Budget Wisely
When you’re earning a high income, the way you manage your budget can make a significant difference in achieving your long-term financial goals. Despite the common perception that high earners don’t need to worry about budgeting, strategic investment planning is crucial for maximizing wealth and ensuring financial stability.
Once you have a budget, the next step is breaking down your savings goal. High earners should aim to consistently save a solid portion of their income before considering discretionary spending. Saving 10% to 15% of income is a commonly accepted rule of thumb for retirement planning. But saving that amount may not be enough if you’re trying to reach $2 million in assets. Per the graphic discussed previously, it may take on average 41 years to save $2 million if you save 10% of $100,000 income, assuming a 6.5% real rate of return.
If you want to retire sooner, start later, or are more conservative with your investments, you may need to save 20%, 30% or even more of your income to hit the target, depending on your income and when you begin to save. For example, by saving 20% you could reach $2 million in 31 years, but saving 30% can get you there in 25 years. Even starting in your 50s, a comfortable retirement is still attainable, but you’re going to have to plow an even more significant portion of your take home pay toward the effort.
2. Take Advantage of Retirement Accounts
Retirement accounts such 401(k)s and IRAs offer tax advantages that can help you grow your savings faster. Considering the numbers outlined above, just maximizing your contributions to these accounts over your working career can often get you to $2 million if you’re a high earner. For 2024, the contribution limit for a 401(k) is $23,000, with an additional catch-up contribution of $7,500 if you’re over 50. At the minimum, you should be investing the amount required to receive your company match and consider the retirement package offered by your employer when weighing job offers.
If you qualify, also consider Roth IRAs for tax-free growth and withdrawals in retirement. This year, the annual contribution limit increased to $7,000. Married couples filing jointly can contribute the maximum at up to $230,000 of income. And since the IRS uses modified adjusted gross income (MAGI), strategies such as increasing your 401(k) can allow families on the cusp to make the cut. Since earnings grow tax-free for the life of the account and there are no required minimum distributions, Roth IRAs provide amazing flexibility once you approach the 59 ½ age threshold for tax-free withdrawals.
3. Diversify Your Investments
While it’s true that diversification primarily aims to reduce risk, it also has the potential to increase returns. That’s because diversified portfolios can capture gains from asset classes that perform well at different times. For instance, in periods when equities are booming, the stock portion of a diversified portfolio drives returns. Conversely, when the equity market is underperforming, other assets like bonds or real estate might provide stability and growth, contributing to overall performance. Working in tandem, the goal of diversification is to deliver a smoother ride toward the goal of $2 million in assets.
Another significant advantage of diversification is the ability to tailor investment strategies to individual risk tolerance levels. Different investors have varying levels of comfort with risk, depending on factors like age, income, and financial goals. Diversified portfolios can be adjusted to match these individual preferences. For instance, a younger investor with a longer time horizon might opt for a portfolio with a higher allocation to stocks, while a retiree might prefer a portfolio weighted more heavily towards bonds and other low-risk investments. This flexibility ensures that investors can find a diversification strategy that aligns with their financial objectives and risk appetite.
4. Look for Opportunities for Career Advancement
Ultimately, we feel the way you really move the needle toward saving $2 million is by increasing your income, particularly in your early years. You’ll want to maximize your chances to let compounding of investments work for you: and that requires earning more money. Easier said than done, though, right? Here are some simple tips.
- Get a higher-paying job: Consider applying for jobs within your field that offer higher salaries or negotiate a raise with your current employer. According to PayScale, a whopping 70% of people who asked for a raise received one.
- Invest in education and training: Investing in your education and professional development can help advance your career and increase earning potential.
- Network: Attend professional events and conferences, and build relationships with people in your industry. Networking can help you find new job opportunities and stay up-to-date with industry trends.
- Be proactive in seeking opportunities: Look for opportunities within your company to take on new responsibilities, lead projects, or pursue other career advancement opportunities.
- Consider starting your own business: whether a side project, ongoing consulting, or some way to monetize a new skill, your own business can provide earning potential if successful.
Final Thoughts on How To Save $2 Million
Consider consulting with a financial professional to tailor your investment strategy to your specific situation. Here at Magellan Financial, we can provide valuable insights ourselves or partner directly with people who can, especially in areas regarding tax planning, estate planning, and complex investment vehicles. This expertise can also help you stay disciplined and on track with your financial goals.
Saving such a significant amount is not without its challenges. Market volatility, unexpected expenses, and life changes can all impact your savings plan. The key is flexibility and perseverance. Adjust your budget, savings rate, or timeline as needed, but always keep your eye on the long-term goal.
Remember, getting to $2 million on a $100,000 annual income is an ambitious yet achievable goal for many families. It requires discipline, smart planning, and a long-term perspective. By following the steps outlined in this guide, you can build a secure financial future for yourself and your loved ones. Remember, the journey of a thousand miles begins with a single step. Start yours today and let Magellan Financial Group guide you toward your financial North Star.
For More Tips for Saving and Investing for High Income Families, Contact Our Team Of Financial Advisors Today!
Sources:
- Americans Think They Need $1.46m To Retire (Bankrate, April 2024)
- How To Balance Retirement and College Savings (Magellan Financial, June 2019)
- Every 25-Year Old American Needs To See This Chart Right Now (Business Insider, March 2016)
- It’s Not Too Late To Save For Retirement (Kiplinger’s, June 2023)
- How Much Should I Save For Retirement (Nerdwallet, May 2024)
- How To Retire With $2 Million (SmartAsset, January 2024)
- 401(K) Limit Increases to $23,000 for 2024 (IRS.gov, November 2023)
- How To Ask for a Raise and Get It (Payscale, June 2024)
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magellan Financial Heirloom Wealth Advisors is a separate entity from WFAFN.
Wells Fargo Advisors Financial Network and its affiliates do not provide legal or tax advice. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgement of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy and security or instrument or to participate in any trading strategy. Additional information is available upon request
