How to Retire with $ 2 Million on the Average American’s Salary
The average American earns about $ 51,480 per year. That’s based on the median salary of $ 990 for the second quarter of 2021, according to the US Bureau of Labor Statistics.
If you earn an average salary, it can seem impossible to save and invest enough to retire as a millionaire, especially with soaring costs for housing, child care, and groceries. But a study by Schwab Retirement Plan Services found that the average 401 (k) plan member thinks they will need just under $ 2 million in retirement.
4 UNEXPECTED WAYS TO IMPROVE YOUR 401 (K)
Think $ 2 million is out of reach? Here’s how to get there with the average American’s salary.
1. Plan to invest for at least 35 years
Most people with average incomes cannot afford to invest a huge percentage of their salary. It is therefore extremely important to invest for the long term and to give your money enough time to capitalize it.
If you invest $ 525 per month over 35 years with a 10% annual return, you would have just over $ 2 million in retirement. That’s only about 12% of an average salary.
THIS INVESTMENT COULD EASILY GROW YOUR RETIREMENT SAVINGS TO $ 1M
You can still hit $ 2 million if you don’t have a 35-year time horizon, but you’ll need to invest more every month. Assuming the same annual returns, you’ll need to invest around $ 875 per month – just over 20% of a worker’s average salary – to get the same results.
2. Get your complete 401 (k) match
It is much easier to become a multimillionaire with an average salary when all that money is not coming out of your pocket. That’s why taking full advantage of your company’s 401 (k) match is a no-brainer.
A common match scenario is 50% of your contributions up to 6% of your salary. If your employer follows this formula, you would need to contribute around $ 515 per month, but you would get over $ 770 each month to invest. An automatic 50% return on your investment is too good to be overlooked. If you’re starting to invest late, finding a job that offers a 401 (k) match can help you make up for lost time.
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3. Invest aggressively
To get 10% returns you will need to invest relatively aggressively. This means that you will need to invest primarily in stocks rather than bonds, especially if you have a few decades left before your retirement. While stocks carry higher risk, the stock market has always recovered from downturns. You can switch to more conservative investments when your retirement is less than five years away.
4. Build a six month emergency fund
While investing is the only realistic way to reach $ 2 million on an average salary, having a cash reserve can help protect your future millions. Aim to build a six-month emergency fund so that you can handle a loss of income or a big expense without touching your investments.
The damage to your equity can be long lasting if you have to sell investments at a loss because you need cash. On top of that, if you withdraw money earlier from a retirement account, you will often owe income tax and a 10% penalty.
5. Invest your salary increases
You might be earning an average salary now, but that doesn’t mean you will earn an average salary forever. Make a habit of budgeting and living below your means. Commit to investing extra money every time you get a raise. For example, you could plan to invest 50% of your next raise and spend the remaining 50%.
Constant investing is only part of the equation to becoming an everyday millionaire. Avoiding lifestyle inflation is just as important in your wealth building journey.