How Much is Enough?
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
Albert Einstein
Question: Is one million dollars enough to save for retirement?
Answer: The answer isn’t a one-size proposition and depends on a variety of factors, including lifestyle, specific financial obligations, plans for the future, and health needs. Many pre-retirees set a goal to accumulate $1 million or more before leaving the workplace.
According to a recent study form the Financial Analysts Journal, the number of 401(k) plans with $1 million or more totaled 180,000 in the first quarter of 2019, up 35% from the end of 2018. Circumstances of these 401(k) participants vary, yet all were average workers following five basic principles to prepare for retirement. Here’s how you can apply them to your financial plan.
Start early
The power of compound interest is an unquestionable force. One way to take advantage of this is by saving and investing early and often. Although young people may not yet have loads of excess money, they do have time on their side. The average 401(k) millionaire started saving early and remained invested for at least 30 years.
Maximize your contributions
In 2023, employees can contribute a maximum of $22,500 to their 401(k) accounts, not counting any potential employer match and the additional $7,500 or $30,000 if you’re over age 50. The average 401(k) millionaire contributed a minimum of 10% to 15% of their income year after year.
Make the most of your employer’s match
Many employers match employees’ 401(k) contributions up to a certain percent. Not taking advantage of this match is like turning down a raise or leaving “free money” on the table. Even if you’re not able to max out your 401(k) contributions, consider contributing the minimum amount necessary to earn your employer’s match.
In fact, 28% of contributions in the average account of 401(k) millionaires came from their employers. Each year, employer contributions increased the average 401(k) millionaire’s savings by almost $4,600.
Choose the right asset allocation
A 2000 study by economists Roger Ibbotson and Paul Kaplan found that asset allocation accounted for more than 90% of the variation in a portfolio’s return over time. If you’re a long-term investor, you know that asset allocation has been an important factor in investment earnings over time.
Investing in growth-oriented investments may help significantly boost retirement savings through the years. While this strategy may not be appropriate for everyone, research has shown that the average 401(k) millionaire invested roughly 75% of their portfolio in growth-oriented investments.
Avoid cashing out early
Most 401(k) millionaires know that staying the course and maximizing your earnings are crucial in reaching long-term retirement goals. Resist the urge to cash out early when changing jobs. Early withdrawals have tax consequences and other penalties. It’s also best to avoid abandoning your investment strategy in turbulent market conditions. Many investors who cashed out in a market downturn missed part or all of the subsequent recovery.
Now is a good time to check your 401(k) balance. Understanding where you are can help you develop a sound strategy to reach $1 million in savings by retirement. Revisit your investment strategy to ensure your asset allocation is consistent with your retirement savings goals. Your investment mix should reflect your growth expectations and risk tolerance, as well as your time horizon until retirement.
Slow and steady may win the race. If you were given the choice of $1 million today, or a penny that doubles every day for the next thirty days, which would you select? The penny would become two cents tomorrow, four the next day, eight two days from tomorrow and so on. Most would select the $1 million but the penny doubling 30 times will become $5,368,709.12 in thirty days. This is the power of compounding. The longer the investment period the more you can benefit.
Working together, you and your financial advisor can navigate these decisions and help you work toward the retirement you envision. Stay focused and plan accordingly.
The opinions expressed are those of the writer as of January 29, 2023, but not necessarily those of Raymond James and Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk, and investors may incur a profit or a loss. Past performance may not be indicative of future results. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply. Diversification and asset allocation do not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities.
“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie
