Could you save $1 million over a lifetime?
Millennials seem to think becoming a millionaire is completely out of the question. But many of them are wrong and are already blundering their way toward $1 million without realizing it. With a little more attention to handling their money, many could end up much better off than their parents.
A new Wells Fargo survey shows that two-thirds of millennials figure it’s ridiculous to assume they will ever accumulate $1 million. But 59 percent are already going through the discipline of saving. The trouble is many are flying blind, unaware of where they should stick the money so their good intentions turn into powerful action.
One obstacle for nonsavers is their view of adulthood. About 85 percent of millennials say that saving for retirement is an important part of becoming a “financial adult.” Yet many see that adult moment arriving at age 32, not at 25 when small savings make $1 million more attainable.
Here’s Wells Fargo’s comparison: Assume you are 25 and earning $32,000 a year. If you start putting 5 percent of your pay in a 401(k) at work or an IRA (individual retirement account) outside of work that year, and then up the amount 2 percent each year with raises for five years, you should have roughly $1 million by retirement at age 65. But a person who doesn’t start saving anything until earning about $36,700 at age 32 falls far short. Even if you copy the same discipline used by the 25-year-old, you end up with roughly $692,000 at age 65 instead of the $1 million.
Here’s how the 25-year-old gets to a million: At 25, he or she puts $1,600 away for the year — about 5 percent of annual pay. Each year after that, savings go up with raises. If $1,600 seems like a scary number for a person with student loan debts, realize that weekly it’s not much at all. You give up only $26.15 a week in take-home pay because Uncle Sam helps out by cutting taxes when you use a 401(k) or IRA. The government’s idea is to incentivize saving so people don’t end up poor and burdening society in their old age.
Yet saving is only part of what it takes to get to $1 million. Investments matter, too, and many millennials get this wrong. They stash their hard-earned money in a savings account earning less than 1 percent, and the money barely grows at all. If you put $1,600 this year in an account earning 1 percent, you will have about $2,380 after 40 years. But that same $1,600 earning 7 percent would become roughly $23,960.
Simple investments that you find in 401(k) plans and IRAs have had a history of growing about 7 percent a year if you average out the ups and downs they go through during many years of saving. And if you want to find one of these funds, look for what’s known as a target-date fund, or a fund that has a number in the name. For example, a fund with 2050 in the name means retirement is planned for the year 2050. And the fund combines stocks and bonds to try to get savings to grow enough for a 2050 retirement.
Keep in mind that these funds don’t guarantee you 7 percent growth. No fund containing stocks or bonds ever provides you guarantees. There could be years of spooky losses, like 30 percent during the last recession. But after the recession, the stock market climbed about 200 percent. Including those losses and gains, target-date funds aimed at young adults have averaged about 7 percent a year for the past 10 years.
If you use a target-date fund, you may not be a millionaire. If you only use a savings account, you definitely won’t be a millionaire.
There is one more step to keep in mind if you’d like to have $1 million by the time you retire. While saving 5 percent of pay helps get a 25-year-old going, more will be needed to ultimately get to $1 million. By age 26, the Wells Fargo example assumes the person has received a 2 percent pay raise and starts saving 7 percent of pay for retirement. After a raise at age 27, the savings jumps to 9 percent. And by age 30, the assumption is that the person is saving 13 percent of pay and continues saving 13 percent a year until retiring.
Saving 13 percent may seem daunting, but keep in mind: Many people with jobs and 401(k) plans get extra money free from their employers when employees save in the workplace retirement plan. So if your employer gives you 3 percent in a 401(k) match, you could save 10 percent of your pay and meet the 13 percent threshold. If you can’t save that much, do as much as you can. See the difference 2 percent more a year makes with this calculator.
Read more at the original source: Millennials: Saving million is easier than you think
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