Many Americans share the goal of retiring as millionaires, but it's not easy to achieve. According to Vanguard's 2023 How America Saves report, the average Vanguard 401(k) holder had a balance of just $112,572. Even among those 65 and older, the average balance was only $232,710.
While it's tough to reach millionaire status, the steps to get there are simpler than you might think. To see whether you're on the right track, ask yourself these three important questions.
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1. Are you investing rather than simply saving?
It's incredibly difficult to build a million-dollar retirement fund through saving alone. Even the highest-yielding savings accounts might only earn interest rates of 5% per year, which is barely enough to even keep up with inflation over time. And don't forget that interest rates on savings accounts vary markedly over time -- sometimes for the worse.
The stock market, on the other hand, has earned an average rate of return of around 10% per year historically. The difference between 5% and 10% annual returns might not seem like much, but it will have an enormous impact on your earnings potential.
For instance, say you have the option to put $200 per month in a savings account earning 5% annual interest or a 401(k) earning 10% average annual returns. Here's approximately how your total earnings would stack up in both situations:
| Number of Years | Total Savings: 5% Avg. Annual Returns | Total Savings: 10% Avg. Annual Returns |
|---|---|---|
| 20 | $79,000 | $137,000 |
| 25 | $115,000 | $236,000 |
| 30 | $159,000 | $395,000 |
| 35 | $217,000 | $650,000 |
| 40 | $290,000 | $1,062,000 |
Data source: Author's calculations via investor.gov.
This isn't to say you can't reach $1 million with a savings account, but for most people, the monthly savings rate required is unrealistic. For example, if you have 30 years to save and are earning a 5% interest rate, you would need to save around $1,300 per month to reach $1 million.
2. Are you taking advantage of all the perks available to you?
A few tips and tricks can make saving easier and help maximize your earnings over time.
For example, if you have access to a 401(k) and your employer offers matching contributions, that money can go a long way. The employer match can instantly double some of your savings with no effort on your part, and if you're not contributing at least enough to earn the full match, you're leaving free money on the table.
Setting up automatic contributions can also make it easier to save. If you have a 401(k), you might be able to have a set amount transferred straight from your paycheck to your retirement account. With IRAs, you can set up automatic transfers from your bank on the schedule you choose.
When your savings are set up automatically, it's easier to build retirement contributions into your budget, rather than simply saving whatever you have left at the end of the month. This will also make you more likely to stick to your plan and reach your goals.
3. Are you avoiding making withdrawals whenever possible?
In some cases, pulling money from your retirement account might be unavoidable. If you're facing a true financial emergency and have no other savings, tapping your 401(k) or IRA could be your only option. But doing so can be expensive in both the short and long term, so it's best to avoid this move unless it's absolutely necessary.
When you withdraw from a 401(k) or traditional IRA before age 59 1/2, you generally have to pay income taxes and a 10% penalty on the amount you withdraw. Early withdrawals can also make it harder for your money to grow over time.
Compound earnings help your money grow exponentially the longer it can sit untouched in your account. Every time you make a withdrawal (even if it's a small one), you're reducing your account balance and limiting your growth potential. If you're making repeated withdrawals, they'll add up over time and make it far more difficult to reach $1 million.
Building a million-dollar retirement fund takes time, consistency, and a lot of patience. But small steps can make a major difference over time, and with the right strategy, you can set yourself up for a more lucrative retirement.
