How to Save One Million Dollars

By Jocelyn Black Hodes

The elusive million dollar milestone…is it reachable? Well, in short, yes. But not without some careful planning and discipline. Time is a key factor, of course. It all depends on your age, when you plan to retire, what kinds of accounts you use, your investment costs, and your risk tolerance. The more you are able to save on a regular basis, the less risk you need to take and the less time it should take to hit that first million.

Start Saving Now

If you are 35 and starting from scratch, for example, you need to save around $735 per month to have $1 million by age 65, assuming an 8% average annual return. If you are 40, you need to save around $1,135 per month. If you were willing to take on more risk with your investments and managed to average a 10% annual return, you would only have to save around $506 per month from age 35, or around $850 each month from age 40. If you were more conservative, you would need to save more. You get the idea. (You can use the SEC’s calculator to plug in your age and determine monthly contributions.)

Keep in mind that these numbers do not take potential investment costs into account like management fees and fund expense ratios, which could decrease your annual returns by more than 2%. This means that you will likely need to contribute more and/or take on more risk to meet your goal. They also don’t take into account inflation and taxes (we’ll get to that in a minute).

Max Out Your Retirement Accounts

So, where is the best place to save this money for retirement? In tax-advantaged retirement accounts, of course! We’re talking about your 401(k), 403(b), traditional IRA and/or Roth IRA. These kinds of accounts allow you to avoid paying taxes on market growth (capital gains), which really makes a big difference in how much you can accumulate over the long run.

If your company has a plan available, the easiest thing to do is to save there through automatic payroll deductions. These types of plans have a 2013 contribution limit of $17,500 or $23,000 if you are over 50. If your company offers a matching contribution (a.k.a free money), you definitely want to put in at least as much as they will match.

If you have maxed out contributions to your company plan and still want to save more, you can put an additional total of $5,500 (or $6,500 if you are over 50) for 2013 in a traditional or Roth IRA. Remember that Roth IRAs — unlike their traditional counterparts — allow you to grow post-tax money that you can potentially pull out totally tax-free in retirement. Some companies even offer a Roth IRA option as well as a 401(k) within their company plan, which means that you could potentially save $23,000 per year of tax-free money (or more, if you’re over 50).

If you do not have a company plan available and are an entrepreneur, or even if you do have a company plan but also freelance part-time, you may be able to open a SEP IRA or Individual 401(k), two other types of traditional IRAs. These plans allow you to save as much as $51,000 (or $56,500 if you are over 50) on a tax-deferred basis, including any other potential savings in other retirement accounts.

Don’t Forget About Taxes and Inflation

It’s also important to remember that, while hitting that 7-figure mark is still a major milestone, $1 million today won’t be worth that much in 25 years. Assuming an average inflation rate of 3%, it would only be worth around $475,000 in 25 years. (Over the last decade, the average annual inflation rate was less than 2.5%, but over the last quarter-century, the average annual inflation rate has been a little over 3%.)

If you want an inflation and tax-adjusted balance of $1 million by age 65, you may need to save upwards of $2,600 per month from age 35, or $3,200 per month from age 40, assuming an 8% return, and not including investment fees or state taxes. (We know: GULP.) Of course, that’s also assuming that you’re starting from scratch and accounting for 3% annual inflation. (You can do your own calculations with Bankrate’s inflation calculator tool.)

We know that may seem daunting; most people aren’t in a position to save $2,600 or more per month. But it does highlight the importance of starting early, or retiring a little later, in order to reach your retirement savings goal. Hopefully, you don’t have to start from scratch and you can build upon some base savings. You will help yourself a lot by saving extra cash (e.g. bonuses, tax refunds, inheritances) in tax-advantaged retirement accounts whenever possible, opening no or low-fee IRAs at a discount brokerage firm, and choosing lower-cost investments like indexed mutual funds and exchange-traded funds. Whatever your goal, the most important step you can take is to start saving anything you can now so your money can start growing and you’ll be that much closer to reaching $1 million, or whatever your personal retirement savings goal may be.

Act Your Age: A Decade-by-Decade Guide to Saving

By the DailyWorth Team

Do you have any regrets about how you’ve prepared for your retirement so far? Noooo, not you, right?

But maybe you’ve heard from friends that they’d be in better shape if only they had remembered to set up that 401k their 20s…or continued to save after the baby was born…or hadn’t pulled out of the market in 2008…or…

Relax. For every regret you (or your, ahem, friends) might feel, there’s an opportunity to boost your retirement savings by avoiding classic mistakes and anticipating age-specific roadblocks.

“It’s inevitable that people have to make adjustments to their plans,” says Jane Bennett Clark, a senior editor with Kiplinger. The trick is knowing what fixes to make, and when.

In your 20s…

At this age, even a little savings is like rocket fuel for your retirement. While studies show that single women in their 20s are earning more (and more than their male counterparts), the reality is that it’s hard for most young people to save energetically for a life that won’t unfold for decades. (We know. We’ve been there.)

The standard to aim for is 10% of your salary. But if you really want to set yourself up, says Clark, “aim for 15% now, because you’re almost certainly going to hit certain roadblocks later in life.” Fifteen percent may sound like a lot, but you can (and should) ease into it—here’s how.

Meaning: It’s likely that your savings will nosedive for a few years if you decide to get your law degree or M.F.A., if you buy a house, if you splurge on a big wedding, or have a child. So frontload your savings while you’re relatively carefree—and you’ll stress less about the health of your nest egg when life takes over in years to come.

Your 20s are also a good time to set up a Roth IRA, Clark notes. The beauty of a Roth is that you put in after-tax money, so it not only grows tax-free, you withdraw it decades from now and won’t owe taxes on your principal or profit. “Starting early means you can really have the benefit of that tax-free growth.”

In your 30s…

It’s time to plan. “It’s too easy to fall into your 30s and 40s without figuring out your overall plan,” says Clark. Then you’re at the risk of life taking over, and slipping behind on your goals.

After all, you typically make some big decisions in your 30s: kids, career changes, investing in a “forever” home or maybe your own business. A plan can help you prioritize, make choices (or negotiate harder for a certain salary level)—so you don’t get off track.

If you don’t have a clear-cut plan that helps you hit savings benchmarks or important goals, meet with a financial planner (and be sure to follow these guidelines, and discuss their fee structure.

If you’re dealing with college savings, says Clark, “chances are you won’t be able to fully fund both college and retirement at the same time, so you’ll have to make choices.

“Since you can’t borrow for your retirement, you’re probably going to have to compromise on college savings.”

One thing that will help protect your plans: an emergency fund of (yes) three to six months of expenses, or an amount that makes sense in your life, which might be more or less. If you have a rainy day fund, you’ll be less likely to raid your 401k or IRA in a crisis.

In your 40s…

It’s time to check your asset allocation, especially if you haven’t given it much thought in, oh, five to 10 years. Unless your retirement money is in a target date fund, which adjusts the allocation of equities and fixed income to be less risky as you get older, your portfolio probably needs a tune-up.

You want to make sure you’re balancing the need for growth (retirement is still a good 20- to 25 years off, for you) with some security. Meaning, if your asset allocation is still pretty aggressive, i.e. weighted more toward stocks or stock mutual funds, you want to make sure you’ve got some hedge (protection) against risk, usually in the form of bonds and cash.

Another common mistake at this age: overcommitting to college bills, says Clark. Two things you can do to prevent filial love from sabotaging fiscal prudence:

1. Be honest with your college-bound or teenage kids about what you can afford, and what sorts of colleges they can apply to. Giving them a reality check will prevent them from being disappointed, and stop you from spending money you don’t have.

2. Avoid the debt trap. The last thing you need going into retirement is a heavier debt load, so don’t tap out your home equity for college tuition!

In your 50s…

As you get older, the likelihood of facing some sort of financial setback only grows. And unfortunately, the older you are, the higher the stakes are. Losing your job when you’re 25 is a bummer; losing it at 55 means you’re looking at an income loss, a dent in your savings, and a hit to your retirement.

Hopefully you’ve been proactive, because frontloading your savings is one of the best ways to tide you over in the event of a financial shock. But if you don’t have that peace of mind, do your best to maintain your retirement contributions, no matter what, says Mary Claire Allvine, an advisor with Brownson, Rhemus & Foxworth in Atlanta.

If you haven’t been able to keep a steady 10% or 15% savings rate, you may have to play catch-up. Fortunately, that’s why there are, literally, catch-up provisions for most retirement accounts for folks 50 and older. Up until age 49 you can only sock away $5,500 in your traditional or Roth IRA (starting in 2013), but it’s $6,500 from age 50 on up.

One idea, if you do need to bear down on savings, is to downsize before you retire, suggests Clark. If you move to a small home, that could save on monthly mortgage or rent payments, plus taxes, heat, utilities, maintenan e. Maybe you can even ditch one of the family cars. “You can save quite a bit by funneling that extra cash into your retirement during the last 10 or 15 years,” says Clark.

In your 50s, it’s also imperative to consolidate all your 401k and rollover accounts—if you haven’t yet. You need to know exactly what your assets are, and where they are, so you can make the most of them.

That’s what it’s about, at any age.