How to Save $1 Million by Retirement

How much will you need for retirement? For many people, the magic number seems to be $1 million.

“I think a million dollars is a good goal to have in mind, but it depends on a person’s unique circumstances,” says Mindy Yu, director of investing for Betterment, a 401(k) retirement plan provider. Your specific retirement savings needs will depend on factors such lifestyle choices and the cost of living in your area.

While saving $1 million for retirement may seem daunting, it can be a doable goal, especially if you follow these tips:

When it comes to amassing a large nest egg, nothing may be more important than time in the market. By opening and funding a retirement account early, workers can maximize the power of compounding gains.

“It can be a 16-year-old putting $20 a week in a Roth (account),” says Shawn Stone, a retirement specialist with Retirement Planners of America in Plano, Texas.

Even at this small amount, after 50 years, a person would have nearly $420,000 in their retirement account, assuming a 7% annual growth rate. Of course, most workers will be in a position to contribute significantly more as their career and income advance.

If you start saving at age 25, putting aside $450 a month at 7% annual gains would result in about $1 million by age 65. But if you wait until age 35 to begin saving, you’d need to double your contributions to reach the million-dollar milestone.

Alan Fletcher, partner at Lift Financial in South Jordan, Utah, makes a point to encourage his clients to maintain an emergency fund that includes at least enough to cover three months’ worth of expenses. “I always have them start with … a little savings in place,” he says.

While an emergency fund may not seem related to saving $1 million for retirement, don’t skip this crucial step. This money ensures you don’t dip into your retirement accounts or discontinue contributions when the unexpected inevitably occurs.

If you work for a company that offers an employer-sponsored retirement plan, start there to reach your $1 million goal. These accounts are funded by payroll deductions, which makes them a convenient and relatively painless way to save.

How much should you contribute? “As much as you can afford,” Stone says.

At the very least, contribute enough to receive your employer’s match, if one is offered. Many companies will match some or all of your retirement contributions up to a certain percentage of your income. “Don’t leave that match on the table,” Stone advises.

In addition to an employer match, some companies will make direct contributions to your retirement fund. However, in both cases, you won’t be entitled to keep that money until you are fully vested.

Federal law dictates how employees are vested in a retirement plan, and 401(k) and similar plans can follow either a cliff or graded vesting schedule. With a cliff schedule, employees become fully vested after three years, while the graded schedule gradually increases vesting from 20% in year two to 100% in year six.

Once you are 100% vested in a retirement plan, all your employer’s contributions are yours to keep even if you quit or are fired. For this reason, it’s smart to stay at a job long enough to be fully vested unless you have a compelling reason to leave.

To reach a million dollars, you’ll need your money to grow over time. That means taking some risks to maximize your returns. Using a diversified portfolio can help manage risk exposure, Yu says.

While stocks often have the potential for the greatest gains, they can be volatile. Investing in a combination of mutual funds, bonds and other savings vehicles can be one option to minimize the impact of any wild swings in the stock market.

While it can be tempting to keep money in conservative investments that are less prone to losses, it will be hard to earn enough to keep up with inflation – let alone reach $1 million – that way. “People may go too conservative too soon,” Fletcher says.

Talk to a financial planner for more information about how to balance investment risk with the need to grow your retirement fund.

While you may not pay them out of pocket, retirement accounts come with fees. These are often assessed as a percentage of the amount you have invested in a particular fund.

Known as expense ratios, they may range from 0.2% to upwards of 2%. If you invest $25,000 for 35 years, a 1 percentage point increase in the expense ratio could mean you have 28% less money at retirement, according to the U.S. Department of Labor.

Index funds tend to have the lowest fees while actively managed funds are most expensive. You should be able to find the fees associated with each fund on your account statement or in the fund prospectus.

If you didn’t start saving early, all is not lost. Once you reach age 50, you can begin catch-up contributions to most retirement accounts. For instance, you can contribute an additional $1,000 to IRAs and $7,500 to 401(k) accounts in 2023.

Catch-up contributions can help make up lost ground, but you may not have cash to spare in your budget to cover them. In that case, you may want to consider picking up a side hustle or part-time job if you are serious about hitting the $1 million mark.

“A lot of older folks now are thinking about how to make additional income,” Yu says.

Retirement accounts come in two flavors: traditional and Roth. With a traditional account, you receive an immediate tax deduction for contributions, but withdrawals in retirement are subject to income tax. There is no deduction for Roth accounts, but that money can be withdrawn tax-free in retirement.

“Saving $1 million in a traditional 401(k) is different than a Roth,” Stone says.

The math can depend on your earnings, age and tax bracket, but younger workers may find that a Roth account results in less of their retirement fund going toward taxes. That’s because decades of gains in the account end up being tax-free.

Fletcher relates a frustrating exchange he had with one young client who was determined to withdraw money from a retirement account simply because he had the option under a provision of federal law. The client didn’t have a need or purpose for the money but simply wanted to withdraw it because he could. That sort of thinking could sabotage any attempt to save $1 million by retirement.

Retirement funds such as 401(k) plans can be tapped for hardships, home purchases or other needs. Plus, many employer-sponsored plans allow you to take out loans from your accounts. Withdrawals and unpaid loans can result in hefty tax bills that will set you further behind your savings goal. They can also be subject to penalties depending on the circumstances.

Even if you pay back this money into your retirement fund in the future, time out of the market could reduce how much your cash grows over time. Except in dire circumstances, retirement funds should be left untouched.

To reach $1 million, it is crucial that workers set money aside year after year.

“That’s where most people get tripped up,” Fletcher says. They may suspend their contributions with the intent to start up after reaching another milestone, such as getting a new job. “A couple years turn into 10 or 12 or 15,” he notes.

Then, not only are workers contributing less toward retirement, but they are missing all the gains that cash could be earning while invested. “It’s the biggest reason why people aren’t achieving that $1 million,” according to Fletcher.

Saving $1 million by retirement isn’t out of reach, but you have to start early and remain committed to the cause. While putting money aside for retirement doesn’t necessarily provide any immediate tangible reward, just think about how good it will feel to someday quit your job with seven figures in the bank.