The Millionaire Retirement Plan: Why You Need to Start Early

Retirement may seem like a far-off time in your life, especially if you are in the early stages of your career, but it's never too early to start saving for retirement. Do you want to save a million dollars for retirement? It can be easier than you think.

You don’t need to have a high paying job or inherit a large sum of money to retire comfortably. You could be a millionaire by just saving a few hundred dollars a month if you start early. In fact, according to The National Study of Millionaires, 93% said they got their wealth because they worked hard, not because they had big salaries, 79% of millionaires did not receive any inheritance, and 75% attributed their success to “regular, consistent investing over a long period of time.”

If they can do it, why can’t you? Learn the steps you can take to achieve millionaire status by retirement. 

Shift Your Mindset and Set Retirement Goals

Trying to explain to someone in their 20s that they should start saving for retirement often falls on deaf ears. They may respond, "I just started working and now I am supposed to start saving for when I'm not working?" When you put it that way, it doesn't make a lot of sense. Young adults buried in student loan debt do not want to even think about saving for retirement. But if you shift your mindset and start thinking of it as "building wealth," then it becomes a much more attractive prospect. By investing money toward long-term growth, you are giving yourself more options down the road.

The first step is to set goals to determine what lifestyle you want in the future. Maybe your goal is to take some time off when you start a family. Maybe you want the ability to cut back on your hours or work part-time in your 50s so you can travel more. Maybe "retirement" means you want to stop working a W2 job when you turn 60 and start consulting. You will have much more flexibility to reach these goals if you've been building wealth over your entire work life.

Using the Power of Compound Interest 

You may have heard that the best time to start saving for retirement is in your 20s when you get your first real job. The biggest reason why is time. The more time your money has to grow and multiply, the less you will have to save overall. This is due to the power of compound interest.

We discuss this at length in our article, “Compound Interest: How it Works in Building Wealth,” but essentially, compound interest is interest calculated on the principal amount plus all interest that has accumulated over time. This allows your savings to grow at an accelerated rate as it compounds. The later you start building wealth for your future, the more you will have to save each month to equal what you could have earned if you started saving early.

Live Within Your Means

According to the millionaires’ study, “Ninety-four percent of the people studied said they live on less than they make, and nearly three-quarters of the millionaires have never carried a credit card balance in their lives!” They were able to focus on saving, instead of digging themselves out of a financial hole each month. While the allure of buying a new car with the latest features, keeping up with the latest fashion trends, or updating your phone or electronics every year is very enticing, it adds up quickly and will tie up money that can be put to better use.

As we discussed previously, compound interest is a powerful tool to accelerate your savings, but it’s also powerful way to accelerate your debt. Seventy-five percent of millionaires do not carry a credit card balance because they know by paying it off every month, they are avoiding paying interest. On the flip side, if you are only paying the minimum due on your credit card bill, that balance is accruing interest (usually at a high rate), and each month that interest is compounding your debt. Did you know that some department store credit cards have a 35% interest rate? When you pay the minimum amount due each month, the balance is accruing interest and then the next month you will accrue interest on the balance plus the interest from the previous month, and so on and so on. You can see now how credit card debt can easily spiral out of control.

Decide What Type of Retirement Account You Want to Open

There are several types of retirement accounts, but the two most popular ones are employer-sponsored retirement plans like a 401k and an Individual Retirement Account (IRA).

The benefits of a 401k include:

• Tax Advantages: These plans allow you to contribute pretax dollars, lowering your taxable income, and your assets will grow tax deferred until retirement.
• Automatic Contributions: You can usually set up payroll deductions with your employer making it easier to save.
• Employer Matches: Many employers offer matching contributions. This match is considered part of your benefits package, so if you don't enroll in your company plan, you are leaving money on the table.
• Ability to Rollover: If you change jobs, you can rollover your 401k into an IRA.

According to the survey of millionaires, “8 out of 10 millionaires invested in their company’s 401(k) plan, and that simple step was a key to their financial success. Not only that, but 3 out of 4 of those surveyed also invested outside of company plans.”

Another popular retirement account is an IRA and the benefits include:

• Tax Advantages: Depending on the type of IRA, you’ll receive different tax benefits. With a Traditional IRA, you may qualify for tax deductible contributions and growth is tax deferred, while with a Roth IRA, your post-tax contributions allow tax-free withdrawals in retirement.
• Control Over Investments: With a 401k, your investment options can be limited, but with a self-directed IRA, you have more control over your investments and can choose a wide range of alternative assets such as real estate, private entities, promissory notes, oil and gas, and more.

I Didn't Start Early - Now What Do I Do?

Never fear because there’s no time like the present. You can’t redo the past, but you can start now and contribute as much as you’re able toward retirement. You have more time than you think. Odds are you will not retire and immediately withdraw all your money from your retirement accounts. You’ll take out what you need, and the rest can continue to grow, hopefully for many years.

If you are not contributing to your employer 401k or haven’t set up an IRA, start now. Can you contribute to both accounts at the same time? Absolutely! Try to contribute the maximum allowed, or as much as you can manage.

For individuals over the age of 50, there is an additional opportunity to boost their retirement savings through catch-up contributions. Catch-up contributions allow those nearing retirement age to contribute more money to their retirement accounts than younger savers. For example, IRAs currently allow an additional $1,000 catch-up contribution per year. Know the annual contribution limits and catch-up contributions allowed for the current year, and if it’s before tax filing day, you can still make contributions for the prior year as well.

Remember, you are not just saving for retirement. You are building wealth to give yourself more flexibility and options in the future. While the best time to save for retirement is in your 20s, the second best time is now. If you are not sure you are on track to meet your financial goals, talk to a financial advisor. If you haven’t set up a retirement account, open one now. If you ever have questions about self-directed IRAs or setting up an individual or employer retirement plan, Quest can help. Just schedule a 1 on 1 consultation with an IRA Specialist today.