Saving $1 million for retirement is a realistic goal for most workers, but it will take a considerable amount of effort to get there. And there are plenty of fees, taxes and penalties that could make it even more difficult to hit this worthy savings target. These strategies will help you to save $1 million over the course of your career:
[Read: 7 Obstacles to Saving for Retirement.]
Start young. The easiest way to save $1 million is to begin saving at your first job. If you start saving at age 25, you could save just $4,682 per year and reach $1 million by age 65, assuming 7 percent annual returns, according to calculations by David Fernandez, a certified financial planner for Wealth Engineering in Scottsdale, Ariz. "You could do that by maxing out a Roth IRA or saving in a 401(k)," Fernandez says. "If you wait until 35, the amount you need to save more than doubles." Beginning at age 35, you will need to save $9,894 each year to accumulate $1 million at age 65. If you further delay saving, you'll need to tuck away $22,798 annually beginning at 45 or $67,643 at 55 if you hope to be a millionaire upon retirement at 65.
Set intermediate goals. While saving $1 million might be your ultimate retirement goal, it helps if you set some intermediate goals along the way. "If you've gotten to save $50,000 or $100,000, then you can do something significant that is important to you to celebrate," says Mary Brooks, a certified financial planner for Brooks Financial Planning in Colorado Springs, Colo. "Your enthusiasm is renewed because you really feel like you have gotten someplace."
Keep expenses low. Pay attention to the expense ratio of each investment you choose, and try to select those with low fees and expenses. "Always go for low-cost investments. The only thing you can control is what you pay for stuff," says Walter Romatowski, a certified financial planner for Castellan Financial Advisors in Palo Alto, Calif. "For most people, it probably makes sense to invest in index funds because they typically have lower expenses as compared to actively managed funds. You can pay 0.1 percent or 1 percent, and that makes a huge difference over your lifetime."
Minimize taxes. Saving in a traditional 401(k) or IRA can reduce your current tax bill and will allow your savings to grow without the drag of income tax. For example, a worker in the 25 percent tax bracket who contributes $5,000 to a traditional IRA will save $1,250 on his current tax bill, potentially allowing him to save that extra $1,250 for retirement. You won't have to pay the taxes until you withdraw the money in retirement. Alternatively, you could pre-pay the income tax using a Roth IRA or Roth 401(k), and no additional taxes will be due on the growth when you withdraw the money in retirement or leave the money to heirs.
Get your employer to chip in. If your employer offers a 401(k) match or makes other contributions to your 401(k), you will get to $1 million much faster than by saving on your own. "If you have an employer 401(k) plan or 403(b) plan, get the employer match if your employer matches," Romatowski says. "If you don't do that, you are just giving away free money."
Don't inflate your lifestyle. As you get raises, try not to increase your spending. Instead, save at least a part of the extra income. "Every time you get a raise, bump your company 401(k) contribution up by another percent or two," Fernandez says. "That way, you don't even notice it that you are saving more." Also, consider saving a portion of other windfalls, including inheritances and tax refunds.
Avoid early withdrawals. Obviously, if you tap into your 401(k) and IRA accounts before retirement, it will be more difficult to accumulate a significant nest egg. The negative effects of early withdrawals also include missing out on valuable compound interest, paying the income tax that will be due on the amount withdrawn and incurring a 10 percent early withdrawal penalty if you are under age 59 1/2.
Don't spend it too quickly. While $1 million may feel like a lot of money, spread over a 30-year retirement, it is likely to provide a modest income. "One million bucks gives you roughly $40,000 of income per year," Romatowski says. "If you save diligently, you can get to $1 million. It just takes a lot of discipline." While becoming a millionaire isn't likely to produce a lavish retirement, gradual withdrawals combined with Social Security payments will likely be enough to provide a comfortable retirement in many parts of the country.