How would you like to retire with a million dollar nest egg?? It’s really not as crazy of an idea as you might think. Stick with me and I’ll explain how, with a little retirement planning, anyone can retire a millionaire.
I think the biggest misconception people have when they think of a millionaire is that it’s only for people that have huge salaries. The truth is, you don’t have to have a 6 figure salary or sell a tech-company to retire a millionaire. All you need to do is be smart with your money and invest it wisely.
With proper retirement planning, you too can reach your golden years knowing you’ll have a nice big nest egg.
Retirement Planning Made Easy
Pay Off Debt
During your retirement planning, the first thing you need to do is pay off your debt. We strongly believe that paying off debt is critical to achieving financial freedom and building your nest egg. It’s so important to us that we added a debt tracker to our Free 2018 Budget Binder if you don’t already have your copy you can get it here.
As you start paying off your debt you’re going to find that you have more money to save for retirement. When you’re trying to decide what to pay off first, choose the smallest debt. Once the smallest debt is paid off, use the extra money you now have to pay off your next smallest debt. This is called the debt snowball and you can learn more about it in Dave Ramsey’s book The Total Money Makeover.
Imagine how much money you could save if you didn’t have any debt. I’ll tell you that the only reason we were able to Save $100,000 in 5 Years or even $20,000 In One Year, was all because we were debt free. If we had a bunch of debt I don’t think we could have done it.
You should tackle your debt and pay it off as quickly as you can.
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Once you have your debt paid off it’s time to start saving money. Before you paid off your debt you were probably thinking it’s too hard to save money with all these bills, right?? Well, now that you have your debt paid off it’s a lot easier. All that extra money you have left because you don’t have a ton of bills to pay is going to build your retirement accounts.
In my opinion, the best and easiest way to start saving money is to create a budget. If you’re not already living on a budget…that’s insane!! Start your budget now! No excuses, just do it.
Seriously it’s so easy to start budgeting. You’ll be able to see exactly how much money you can save each month when you create your budget. If you need help setting up your budget check out Ultimate Guide To Budgeting or Cash Envelope Budget System. We’ve been using the cash envelope budget system for years and we love it!
With so many ways to save money, we wanted to make it easy for you.
Invest Your Money
You’ve made it to the most important step that you absolutely HAVE to complete in order to retire a millionaire. You got through paying off debt and you’re saving money but what’s next? If you want to retire a millionaire you have to make your money work for you, even when you sleep!
Putting your money in a savings account is a waste of time and money! I guess it’s better than putting it under your mattress but you really need it in a high interest yielding account.
It’s time to talk a little about investing. My advice when it comes to investing is to start early and save often. The big thing investing has over savings accounts are the interest rates.
When you put your money into a standard savings account, you’re probably going to get around .25% interest on your money. That’s really low and isn’t going to make you a millionaire. You should be looking at higher interest yielding accounts. The most important thing to understand with investing is that there is risk involved. You could end up losing your money if you aren’t careful. Diversify your portfolio to protect yourself.
Common Types of Investment
Money Market: Essentially a high interest yielding savings account, money markets can be a simple and easy to use investment tool. If you are looking for a small step towards investing, try a money market. These accounts act very similar to regular checking and savings accounts allowing you to write checks and withdraw money. Right now Dime Community Bank is currently offering 1.35% APY on their money market accounts.
IRA: Individual Retirement Accounts (IRA) are a great way to invest your money. There are two main types, Traditional and Roth. Each type has it’s advantages so make sure you do your research before you put your money into one. Keep in mind, if you withdraw money from your IRA before you turn 59 1/2 years old you will incur a 10% penalty.
401K: Investing in your company’s 401K plan can be a great way to invest your money. Many companies will match a certain percentage that you contribute to your 401K. That’s essentially free money! These accounts act very similar to IRAs and require you to wait until age 59 1/2 before you can withdraw without penalties. There are several caveats to when you can withdraw your money as well as when you have to start drawing your money. As with all investments, do your research.
Mutual Funds: This is our favorite way to invest money. Our mutual funds have done really well for us and we recommend them to anyone that asks. Mutual funds are essentially a pool of money that is actively managed by an account manager. The account manager tracks stocks and bonds in the funds you choose and moves the money as necessary to get you better returns.
Stocks: I really enjoy watching the stock market and investing this way but it can be risky. If you’re going to play the stock market, you really have to do your due diligence and study the company you want to invest in. Check out the book the Intelligent Investor for more information on choosing good companies to invest in. There are a lot of easier ways to invest your money but I wanted to throw this option out there.
The Power of Compounding Interest
Compound interest is your best friend when it comes to investing your money. If you’ve never heard of compounding interest, it’s essentially making money off of the interest you have already earned on your investment. The higher your interest rate and the more frequently your interest compounds, the more money you will make.
Here is a hypothetical example of how compounding interest can help you. Let’s say you have $10,000 in a fund that returns 10% interest over the course of the year. At the end of the year, you have $11,000 after making $1,000 in interest.
When you have compounding interest, next year if you get the same 10% return you would make $1,100 because you gain interest from the $11,000 you started with. The compounding interest makes your money grow much faster.
How Much Should I Invest
This is the question that everyone wants the answer to. There are several variables such as your
How much you invest each month will really depend on how much you can afford. Many financial advisors will suggest trying to invest 15% of your annual income into a retirement account. However, I realize that this can be hard to do. Until we really got into budgeting and frugal living, I would have told a financial advisor he is crazy to think I had 15% to put into an account.
I say aim for 15% but invest as much as you can afford and still be able to pay the bills and put food on the table. Every little bit counts!
The rate of return you see on your investment is going to play a role in how much you need to invest to hit a million dollars. A good money market, like the one we leave our emergency fund in, gets about 1.3% interest. That’s better than a savings account but if you go with an index fund you could see around 7%. We have mutual funds where we are averaging around 13% over the life of the investment.
Start Early, Save Often
When it comes to investing your money, the sooner you start the easier it’s going to be for you to retire a millionaire. Let’s look at a 25-year-old who makes $40,000 per year. He plans to retire at the age of 67 and wants a million dollars in his retirement account when he does. If he puts away $355 per month into a nice conservative index fund and gets a 7% return each year, he would retire with $1,000,000!!
By investing just 10.5% of his annual income he will retire a millionaire!
I think the cool thing to notice from that chart is the total contributions versus the amount of interest. Look at how much interest is gained off the small contribution he makes over 40 years.
Now let’s compare that to someone who is 40 years old and is just starting to save for retirement. This person is retiring in 27 years at age 67 with the exact same 7% rate of return. In order for this person to hit $1,000,000 by retirement, they would have to contribute $1,100 dollars per month!! That’s like having a second mortgage, sounds crazy, doesn’t it??
That’s how important starting early can be!
Again, look at the interest versus total contributions and you can see it requires a much higher contribution to get to one million dollars. Although this person still retires a millionaire, it definitely wasn’t as easy as it could’ve been if they started earlier
If you are going to take anything away from all of this it should be that it’s never too late to start saving for retirement. It doesn’t matter if you are 18, 38 or 58, start saving for retirement now and you will be happy when you get there.
Take some time to find a financial advisor who can help you with your retirement planning and start saving now!