Retire Comfortably Under $500k: Discover the Affordable Path

Last updated Jun 21, 2023

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Building a nest egg can be daunting, even with a modest goal like $500,000 in savings. However, the good news is that with smart saving and compounding interest, you could be closer than you realize. In fact, maxing out your 401(k) plan and putting away as much of your salary as you can each pay period are critical steps toward saving nearly $500,000 or more for retirement, according to Leon LaBrecque, CEO of LJPR, a fee-only financial advisor and wealth management firm based in Troy, Michigan.

Here’s how you can do it.

The Best Way To Save For Retirement

LaBrecque has helped some clients save well over $500,000 for their futures and believes he has found a solid formula for wealth accumulation: Simply save a larger percentage of income.

LaBrecque recalled how one client approached him in the early 1980s and said, “Just give me something simple to do.” LaBrecque responded, “Save 18.7 percent of your money in the Vanguard Windsor Fund.” In 20 years, the client had amassed a whopping $2.5 million.

This successful strategy is known as the 18.7 percent solution and includes employer contributions. So, if your employer matches 5 percent, your job is to save just 13.7 percent.

Let Compound Interest Do the Heavy Lifting

The key to building your retirement fund isn’t actually done by you. If you’re hoping to hit close to $500,000, you’ll need to count on the steady returns produced by investing in a diversified mix of stocks and bonds. An individual making $67,521 a year and investing 18.7% of their salary with an 8% rate of return compounding annually would reach the goal of $500,000 in just under 19 years. Hold on until year 26 before retiring, and that figure will have ballooned to $1.2 million.

Why You Probably Need Nearly $500,000 for Retirement

Your ideal retirement savings depend on your lifestyle and whether you want to maintain it in retirement. If you’re planning to continue living a luxurious lifestyle through your golden years, even $750,000 or $1 million more in retirement savings might not be enough. Getting to your retirement goal is doable if you start early, know how much to put away, and understand how to withdraw funds in a disciplined fashion, usually at a rate you’ve worked out with your financial advisors.

Cost of Living Matters

No one can accurately answer the question of “How much do I need to retire?” until they’ve carefully considered their anticipated expenses. Living in a metropolitan center and making at least $75,000 per spouse might require $1 million or more in retirement savings. Living outside of pricey cities could mean you need less, but getting to at least $500,000 can mean more flexibility in deciding how to spend your retirement. The good news is, even if you’ve decided you need considerably more than $500,000, the methods for getting there are pretty similar.

1. Check Out Your 401(k) Match

Go to your benefits director and find out how much your employer will match in your 401(k) or other retirement savings plan. Then, put as much money into the 401(k) plan as you can to earn the maximum match.

2. Save Half of Any Raise You Get

If you get a 2% raise, increase your 401(k) contributions by 1%. Keep doing this with every raise you get. Don’t just increase the sum you put into the plan, but increase your percentage contribution as well.

3. Don’t Freak Out When Markets Tumble

When the stock market experiences a downturn, some investors panic and immediately sell their stocks. However, dumping your stocks is often a huge mistake. Down markets are sales. We buy steak on sale and clothes on sale. Make investments on sale. In other words, a down market can be a chance to buy at a discount. Also, remember that saving for retirement is a long-term process. Eventually, the stock market will recover, and so will your investments.

4. Invest Your Tax Refund

Next year, don’t use your tax refund to splurge on a flat-screen TV, a new pair of shoes, or a last-minute vacation. Instead, invest your tax refund to help you reach your retirement fund goal. Direct deposit is not only the “best and fastest way” to get your tax refund, according to the IRS website, but it can also help you resist the urge to spend your tax refund on nonessentials. You even have the option to split your refund into two or three additional financial accounts, including an IRA.

5. Invest In Yourself

Taking classes, earning an MBA, or doing whatever you can do to increase your value as a professional can all pay dividends in the long run. You’ll earn more, which should mean you’ll be able to invest more. Many employers will even foot the bill for the classes.

This article originally appeared on finance.yahoo.com – 2023-06-19 17:52:13