The common joke of how to make $1 million in retirement is to start with $2 million. But jokes aside, there actually are ways to attain a seven-figure retirement fund. However, these strategies are not for faint-of-heart/quick-fix types of people and surprisingly, these ways consistently work.
First, let's begin with the real question—is $1 million enough? Based on investment rules of thumb, a retired investor should expect to withdraw between 4 and 5 percent from his or her retirement accounts annually. Therefore, each $1 million of investments should provide $40,000 to $50,000 per year of inflation-adjusted income. But is $50,000 (in today's dollars) enough for you to live on? Depending on where you plan to retire, you might need two to four times that amount. Keep that in mind when assessing retirement needs.
The first way to make it to $1 million in retirement is to begin with systematic investments. The best way to invest is through consistent monthly allocations. Investing monthly, which seems inconsequential, can add up to a large balance over time. This can be done with your company retirement plan, 401(k), or through your own personal savings plan. The more money you invest, the sooner you will hit your goal.
Secondly, generating a solid, consistent rate of return is the key to making money and keeping it. Many people talk about a stock that returned 40 percent in one year or another, but they often neglect to inform you about the two stocks they bought that went belly-up. Returns are about your whole portfolio, not about an individual investment. Think of your portfolio as a team of securities working together to help you reach your goal. If they are all working and supporting one another, you get to your goal more quickly. However, if one or two of them are high flyers but carry a lot of risk, they can either significantly help or significantly hurt your portfolio's overall value over the long haul. Make sure you build your investments as a portfolio rather than as an unrelated group of disorganized securities. Next, make sure they are invested wisely to take advantage of highs in the market, but aren't so risky that they'll lose all those gains during the lows.
Third and finally, watch your tax bill. Paying taxes is American, patriotic, extremely necessary, and a legal requirement. Paying too much tax or not being tax-efficient is the total opposite. Investing with taxes in mind is important, because if you are not careful they can cost you a third of your investment returns.
[See The Tale of Two Taxes.]
A great way to be tax conscious is to use tax-deferred and tax-efficient investments. Using IRAs, 401(k)s, and annuities, which are all tax-deferred, can significantly help your long-term planning. Roth IRAs are ever more efficient, because their distributions are essentially tax free. Furthermore, when choosing individual securities, it might be more tax effective to use exchange-traded funds (ETFs), because you are not taxed until you sell the investment.
In general, it is best to invest systematically on a monthly basis and choose a portfolio that will not take too much risk to make money when the market goes up, but also won't give all the gains back when the market goes down. Finally, finding a way to give a little less to the government each year from your investments is much more efficient and can get you to your goal more quickly.
Kelly Campbell , Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, A Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.