Here’s how to retire a millionaire, according to financial professionals

Building a $1 million piggy bank may seem like an impossible task.

However, accumulating such retirement wealth is within reach of almost anyone — provided they take certain steps, financial advisors say.

“You might think, ‘Well, I have to become a Silicon Valley entrepreneur to get rich,’” says Brad Klontz, a financial psychologist and certified financial planner.

In fact, you can be a fast-food worker all your life and accumulate wealth, says Klontz, a member of the CNBC Financial Advisory Council and the CNBC Global Financial Wellness Advisory Board.

The calculation is simple, he said.

Every time you get a dollar, you save and invest a percentage toward your “financial freedom,” Klontz said.

With this mentality, “you can have almost any job and retire as a millionaire,” he said.

Saving $1 million may sound like a “herculean task,” but it “may not be as difficult as you think,” says Karen Wallace, CFP and former director of investor education at Morningstar. wrote in 2021.

The key is to start saving early, perhaps in a 401(k) plan, an individual retirement account or a taxable brokerage account, experts say. This allows investors to benefit from the magic of compound interest for decades. In other words, you “let your investments do as much of the heavy lifting as possible,” Wallace wrote.

According to a Northwestern Mutual, about 79% of American millionaires say their wealth is “self-made.” poll published in September. Only 11% said they inherited their wealth, while 6% got it from a stroke of luck such as winning the lottery, according to the survey of 4,588 U.S. adults, conducted Jan. 3 to 17, 2024.

More from Personal Finance:
IRS: An important deadline for RMDs is approaching
Egg prices could soon ‘flirt with record highs’
The Federal Reserve is likely to cut interest rates next week

As of September 30, there were 544,000 Americans with a 401(k) balance of more than $1 million. according to to Fidelity Investments, the largest administrator of workplace retirement plans. There were also more than 418,000 IRA millionaires.

In fact, the number of 401(k) millionaires grew 9.5%, or 47,000 people, between the second and third quarters of 2024, largely due to stock market gains.

Winnie Sun, a financial advisor, gives an example of the math that links $1 million in wealth to consistent saving.

Let’s say a 30-year-old makes $60,000 a year, after taxes. If they saved $500 a month — or 10% of their annual income — they would have $1 million at age 70, assuming an average market return of 7%, she said.

This doesn’t take into account financial factors that could drive savings during that period, such as a company 401(k) match, bonuses or raises.

“In 40 years, you’ll have over $1 million, and that won’t make anything but $500 a month,” says Sun, co-founder of Sun Group Wealth Partners, based in Irvine, California, and a member of CNBC’s Financial Advisor Council . .

It’s also important to avoid debt, which is probably the “biggest gap” to build savings, and not increase spending too much, Sun explains.

Timing is more important than being perfect, Sun said.

She recommends starting with a low-cost index fund — such as one that tracks the S&P 500, which spreads savings across the largest publicly traded U.S. companies — and building from there.

“Even waiting a year can make a dramatic difference in reaching that $1 million point,” Sun said. “Stop and take action.”

Of course, a $1 million pension may not be the right amount for everyone.

An often-cited rule of thumb – known as the 4% rule – suggests that an average retiree can draw on about $40,000 a year from a savings of $1 million, safely assuming that he will not run out of money upon retirement. to sit. (That annual withdrawal is adjusted annually for inflation.)

For many, this amount would be supplemented with social security.

Fidelity suggests a savings goal based on income. For example, an employee would have to do this at the age of 67 saved the target 10 times their annual salary to ensure a comfortable retirement.

Ideally, households should aim to save 15% to 20% of their income, Sun said. This is a rule of thumb often cited by financial planners.

How much wealth you want — and how quickly you want to get rich — will determine the percentage, Klontz said.

He personally aims for a savings rate of 30%, but knows people who have achieved almost 90%. Saving such large portions of one’s income is a common thread in the so-called FIRE movement, which stands for Financial Independence, Retire Early.

How do they do it?

“They haven’t moved out of their parents’ house, they’ve minimized everything, they’re not buying new clothes, they’re taking the bus, they’re shaving their heads instead of paying for haircuts,” Klontz said. “There are all kinds of hacks you can do if you want to get there faster.”

Of course, there is tension here for people who want to enjoy life today and save for tomorrow.

“We weren’t supposed to just survive and save money,” Sun said. “There has to be a good quality of life and that happy medium.”

One strategy is to spend 20% of household expenses on the things that matter most to you — perhaps big vacations, nice cars or the latest technology, Sun said.

Make some concessions — that is, “cut back and save” — on the remaining 80% of household expenses, she said. This gives savers the feeling that they are not reducing their quality of life, she said.