Who doesn’t want to be a millionaire someday? The problem is, that many people think the only way they’ll ever have a seven-figure bank balance is to win the lottery or inherit a fortune from a previously unknown and distant relative.
In reality, though, becoming a millionaire may be a pretty attainable goal. With hard work, patience, and dedication, no reclusive, rich relative is required. It’s called retirement planning.
The number of American millionaires is on the rise, as the retirement account balances of an unprecedented number of 401(k) plan participants and IRA accountholders reach $1 million or more. Both Fidelity Investments and Vanguard Investments reported record-setting increases in the number of participants whose retirement plans have at least seven figures in value.
What are they doing?
It’s really all about saving consistently, maxing out your contributions and taking advantage of any bonuses or matching options you have available to you. Effective IRA and 401(k) plan management can go a long way.
There are 6 steps you can take to increase your chances of becoming a millionaire upon your retirement.
Set Your Goal, Make a Plan
If your aim is to have $1 million or more in your retirement accounts by the time you call it a career, you’ll have to work out a careful and realistic plan to invest a certain amount from each paycheck, depending on the number of years you have before you plan to retire.
The younger you are when you start planning and saving for retirement the better, of course, but it’s never too late to save. If you’re getting a later start, you’ll have to save more aggressively and possibly take advantage of catch-up contribution allowances, if you’re able.
If you’re starting from scratch and planning to retire in five years, $1 million may be too ambitious, but again, it’s never too late to save. You may just have to re-evaluate your goal. Contact a financial advisor to create a plan based on your specific situation.
Make Consistent Contributions
Another trick to becoming a retirement plan millionaire is making saving for your retirement a priority. This might mean sticking to a tighter budget and making some sacrifices now so that you can focus on your retirement goals. If your employer sponsors a 401(k) plan, sign up and start making the maximum contributions you can afford. Continue making those contributions, even when times are a little lean. Then save more when you can, making increases to your contribution amounts when your income rises.
One way to avoid financial situations that might otherwise hinder your ability to make consistent retirement fund contributions is to have an emergency fund. If you have sufficient savings to cover expenses in the event of some type of financial insecurity, you won’t have to either reduce your contributions to cover your day-to-day expenses or take early withdrawals from your retirement savings (which could result in hefty penalties for doing so).
And don’t let the threat of a recession or a dip in the stock market discourage you. Stay focused on your long-term plans. Investing consistently in both good and bad markets is one important key to managing your investments. Remember, you’re making investments for the long haul, so don’t get spooked by a bear market and lock in temporary losses by selling when investment values are down. The flip side of a market downturn is that it can be a great time to buy low. Discuss your concerns with a financial advisor.
Take Advantage of Matching Options
If your employer offers a contribution matching program, make sure to take advantage of it to effectively double your investment power. Make sure you know the maximum percentage to get the employer’s full match, and contribute at least that much if you can, otherwise you’re basically saying “no thanks” to free money. You can’t afford to pass up additional savings when your goal is $1 million.
Don’t Set-it-and-Forget-it, Review and Update Your Plan if Necessary
Although obsessively checking your portfolio can make you lose sleep at night (retirement savings is a marathon, not a sprint), you also can’t afford to select your asset allocation once and then forget about financial planning and investing until Retirement Day. Experts recommend checking in on your portfolio at least once a year, rebalancing your investments and allocations as necessary, so you can stay on track.
Don't Blindly Invest in a Lifestyle Plan
There is no such thing as a one-size-fits-all retirement plan. What works for one investor might not work for you. You may have more (or less) time to save than someone else, and therefore may be more (or less) willing to take on greater risks in hopes of higher gains.
Don’t pick a plan because it sounds great on paper, or because it worked well for someone you know. Do your research and your due diligence, and for greater peace of mind, make an appointment to discuss your options with a financial advisor who can help you get your ducks in a row.
The same advice goes for picking a financial advisor. Referrals from friends and family are great, but do your homework and find the advisor who is best for you. Research a financial advisor’s credentials and understand their approach.
Get Help from a Professional
You may think that handling your financial planning needs on your own will save you money, but the opposite is often true.
If the financial services industry is not your area of expertise; if you’re not up-to-date on tax-planning strategies, estate laws, and state retirement regulations; if you’re not equipped to make educated, unbiased, and researched decisions when it comes to your money, you can make mistakes. And even small mistakes can have a big impact on your financial future. Just read our recent blog post: Managing Your Own 401(k)? 5 Common Mistakes Made by DIYers.
IRAs, 401(k)s, 403(b)s, Thrift Savings Plans (TSPs), and pensions can be complicated, and understanding the right time to take Social Security benefits, what your true risk tolerance is, and how to manage your retirement plan contributions can be complex decisions. IRA and 401k plan management can be very involved.
Even if your retirement goal isn’t having $1 million, working with a financial advisor to help you plan for retirement can be a huge benefit, whatever your financial dreams are.
If you’re not sure how to get started, contact Scarborough Capital Management to see if we’re a good fit.
The opinions voiced on this blog are for general informational purposes only and are not intended to provide or be a substitute for specific professional financial, tax or legal advice or recommendations for any individuals.
Before investing in a 529 plan, you should inquire about the particular plan, its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Please consult your tax advisor regarding the state and federal consequences of the investment.
Scarborough Capital Management is not affiliated with the US Government or any governmental agency. As such, this content was not approved, endorsed, or authorized by the US Government and/or any governmental agency.
Go to www.ssa.gov for more information about the United States Social Security Administration.
Securities through Independent Financial Group, LLC (IFG), a registered broker-dealer. Member FINRA/SIPC. Advisory services offered through Scarborough Capital Management, a registered investment advisor. IFG and Scarborough Capital Management are unaffiliated entities.
