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It might sound impossible to retire a millionaire on a $50,000 annual salary. But, it would only require saving between 11% and 25% of your income each month to reach it by 65.
On a $50,000 per year income, it’s possible with the right type of account and automatic investing, says Daniel Demian, a financial advice expert at personal finance app Albert. He recommends using an employer’s 401(k) — a type of account that saves money directly from your paycheck and offers a match and tax benefits — to make it simple and automatic. “It’s very doable because you’re putting it away; you’re forgetting it,” he says.
If you’re under age 30, invest between $300 and $700 monthly to reach $1 million
If you want to reach $1 million by the time you retire, it will help to start early.
Retirement accounts grow with compounding interest. “Every dollar you contribute earns an interest rate. That dollar plus interest then earns interest the next year, and then so on,” Demian says.
Based on this compounding interest, the amount you’ll need to contribute will change over time. Here’s what you’ll need to contribute each month to reach $1 million by age 65, assuming a 6% rate of return compounded monthly, starting at $0.
The longer you wait to start, the more of your paycheck you’ll need to contribute to reach $1 million. While a 24 year old could contribute just over 15% of their paycheck and have their account reach $1 million at 65, a person who waits until age 30 would need to contribute closer to a quarter of their biweekly paycheck to get the same result.
A 401(k) match could reduce the amount you need to contribute
If you have a 401(k) plan, you might only need to contribute some of this amount since many employers match what you contribute, up to a certain percentage.
“This can actually be a shortcut,” Demian says. “Instead of being in that position where you have to invest 12.8% of your salary, if your employer matches 5%, all you have to do is put in 7%. Then, your employer is going to do the rest.”
While each plan is different, you may not need to put in the full amount you need to invest each month in order to reach $1 million — the match may complete the amount you’d need to save. Then, you can focus that extra cash on other saving or investing goals.
Each employer sets their own rules around matches, and whether or not they’re available. It depends on your employer’s plan, so checking with your employer’s HR department is the first step to get started with a 401(k).