The two-step process is straightforward, but not everyone has the discipline to unlock its full potential.
Most people need to build significant retirement savings if they want to maintain their lifestyle after they stop working. Social Security provides most people with enough to meet basic needs, but not much more. For most families, any other cash requirements need to be covered by retirement accounts. The best way to 10x retirement savings in two decades is a two-pronged approach: Save regularly and invest those savings for responsible growth.
Step 1: Build consistent savings habits early
No investment strategy can overcome insufficient saving, and you can't build a retirement account without turning earnings into assets.
Consider a hypothetical retirement account with $100,000 worth of securities in its investment portfolio. If no additional contributions are made to the account, then it can only grow through investment returns. In order for that account to grow 10x to $1 million within 20 years, it would need compounding average annual returns of nearly 13%.
Image source: Author's calculations.
It is not reasonable to expect this sort of performance in your retirement account. This would require your allocation to significantly outpace the market as a whole year after year. Even the most accomplished active investors fall short of this performance, and it's not wise for amateur investors to rely on that sort of exceptional performance.
Even if you could devise a world-class strategy that crushes market index returns, you'll still have to deal with shifting portfolio allocation as you approach retirement. As the investment time horizon gets shorter, it's standard practice to increase bond exposure in your retirement account to lock in long-term gains and reduce volatility. This removes the risk that a bear market will wipe out your savings, but it also reduces your investment growth potential.
Image source: Getty Images.
If you can contribute $15,000 to that hypothetical retirement account referenced above, then you'll only need an 8% annual rate of return to surpass $1 million in 20 years. That's very achievable, based on historical market performance.
Image source: Author's calculations.
Investment growth is powerful, but there are limitations to its realistic potential.
That's why it's so important to make consistent retirement account contributions. Financial planners generally recommend that households strive to retain 15% to 20% of annual earnings if they want to effectively meet their retirement goals. Not all of those savings have to be directed to retirement accounts -- it's fine to build other assets, such as home equity. However, retirement should still be a high priority in your financial plan.
A 15% to 20% savings rate isn't always feasible, and it's OK if there are times when you fall short of that goal due to unexpected circ*mstances. It's still vital that your financial plan reflects that long-term savings goal and that you are making up for lean times during periods when you have extra cash flow. To maximize retirement savings, make sure that you're using all the resources available to you. Take full advantage of employer 401(k) matching programs if they're offered to you. Use a health savings account (HSA) if you're eligible.
Step 2: Invest for growth
If you're saving the right amount, then a good investment strategy should be more than enough to deliver 10x asset growth. In your earlier working years, your retirement account has the longest possible time horizon -- those funds won't be accessed for multiple decades. That makes short-term volatility and market cycles functionally irrelevant, because you shouldn't have to access those funds and sell stocks when they're down.
A long time horizon allows you to allocate aggressively toward equities and growth assets to maximize returns. You can worry about managing volatility later down the road when it's advantageous to do so. In the meantime, build a balanced equity portfolio with relatively heavy growth stock exposure to maximize long-term returns.
Consider the hypothetical retirement account from before. If it was invested too conservatively and returned only 4% annually, then it wouldn't even grow to $650,000 over 20 years, even with $15,000 being contributed each year.
Image source: Author's calculations.
Don't take unwise risks with your retirement savings, but don't be scared to exchange volatility for growth. A properly diversified portfolio of equities might go through ups and downs over the years, but it should provide plenty of long-term upside. As long as you don't sell when the market is down, history tells us that the market will eventually recover and deliver returns for shareholders.
FAQs
According to Buffett, you should invest 90% of your retirement funds in stock-based index funds. According to Buffett, the remaining 10% should be invested in short-term government bonds. The government uses these to finance its projects.
What is the 10x rule for retirement? ›
According to retirement-plan provider Fidelity Investments, the rule of thumb is to save 10 times your income if you want to retire by age 67. Adjust this amount if you want to retire any earlier or later.
How long will $100,000 last in retirement? ›
Summary. If your annual spending amounts to $20,000, $100k will last you for five years. How much you need to retire depends on a number of factors, including retirement age, intended lifestyle, other income sources, and expected expenditures.
How to save $1,000,000 in 20 years? ›
To save $1 million in 20 years, you would need to save approximately $1,900 per month, assuming an average annual investment return of 7%. This calculation considers the power of compound interest and is subject to variations based on actual returns and investment choices.
What is the golden rule of retirement savings? ›
Rule of thumb: "Save 10% to 15% of your income for retirement."
How to reach $1 million in retirement savings? ›
Starting early gives you much more flexibility. If you begin putting away $300 a month at age 25, you can reach your retirement savings goal while enjoying the ability to spend freely. If you're able to start saving at age 20, you can contribute just $190 a month and be able to reach your million-dollar target.
What is the $1000 a month rule for retirement? ›
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
How long should $500,000 last in retirement? ›
Retiring with $500,000 could sustain you for about 30 years if you follow the 4% withdrawal rule, which allows you to use approximately $20,000 per year. However, retiring at a younger age will likely reduce the amount you receive from Social Security benefits.
Can I retire at 60 with $100,000? ›
“With a nest egg of $100,000, that would only cover two years of expenses without considering any additional income sources like Social Security,” Ross explained. “So, while it's not impossible, it would likely require a very frugal lifestyle and additional income streams to be comfortable.”
How many people have $3000000 in savings? ›
There are estimated to be a little over 8 million households in the US with a net worth of $3 million or more.
According to estimates based on the Federal Reserve Survey of Consumer Finances, a mere 3.2% of retirees have over $1 million in their retirement accounts. The number of those with $2 million or more is even smaller, falling somewhere between this 3.2% and the 0.1% who have $5 million or more saved.
What is a good monthly retirement income? ›
The ideal monthly retirement income for a couple differs for everyone. It depends on your personal preferences, past accomplishments, and retirement plans. Some valuable perspective can be found in the 2022 US Census Bureau's median income for couples 65 and over: $76,490 annually or about $6,374 monthly.
How many Americans have $1,000,000 in retirement savings? ›
As of June, there were roughly 497,000 so-called retirement-created millionaires in the U.S., according to the wealth management firm, which analyzed balances across 26,000 of its customers' accounts. Nearly 399,000 Americans also have a least $1 million in an individual retirement account.
What percentage of retirees have $3 million dollars? ›
The Employee Benefit Research Institute (EBRI) estimates that 3.2% of retirees have over $1 million, and a mere 0.1% have $5 million or more, based on data from the Federal Reserve Survey of Consumer Finances. 2. What is the estimated amount of money needed to retire at age 60?
Can you live off interest of 1 million dollars? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
What is the 90 10 allocation in retirement? ›
The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds.
What is the 90/10 rule of retirement? ›
The 90/10 Rule of Retirement: Defined
“In preparation for retirement, most people spend 90% of their planning time on the financial issues and 10% on the non-financial issues. After retirement, the ratio reverses, and most retirees spend the vast majority of their time focusing on the non-financial issues of life.”
How much cash should a retiree hold? ›
It provides a buffer against unexpected expenses, market volatility, and ensures you have readily accessible funds when needed. For most retirees, having 1 to 2 years of expenses in cash is a prudent guideline, offering greater financial security and flexibility during retirement.
What is the 90 10 rule for savings? ›
The easiest way to do it is with the 90/10 rule. It goes like this: 90% of your contributions go to safe, boring investments like low-cost total stock market index funds. The remaining 10% is yours to play with.
