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How to retire a millionaire
The average person might believe that millionaire status is reserved only for the upper echelon of society, but that isn’t the case. With the right mindset, it’s possible for you to become a millionaire by the time you retire.
You just need to follow certain guidelines:
- Know the power of compound interest.
- Pay attention to taxes and fees.
- Stick with a long-term plan.
- Ignore the noise.
- Become a conscious spender.
- Live below your means.
- Delay gratification.
- Consider becoming an entrepreneur.
Embrace these tips over the course of your working years, and you may be surprised at how simple it is to reach seven figures by retirement.
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Know the power of compound interest
The longer you save, the more compound interest you earn. To really leverage compound interest, start saving early and continue saving throughout your earning years.
Here’s an example from CFP professional Gregory De Jong, an adviser with Savant Capital Management: Assume Joe earns average annual returns of 10 percent in stock mutual funds. Starting at age 30, he would need to invest only $263 a month to have $1 million by age 65. “That’s less than $9 a day,” De Jong says.
But if Joe starts saving five years earlier, at age 25 instead of 30, he’d need to bank just $158 a month, or about $5.25 a day.
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Pay attention to taxes and fees
Those who become millionaires were quick to learn one of the wisest moves: investing in a tax-advantaged retirement account, such as a 401(k) or IRA.
You fund these accounts with pretax dollars, thereby lowering the taxes you’ll pay that year.
“Uncle Sam’s letting that investment grow with taxes deferred until you withdraw the money at retirement,” says David Rosell, president of Rosell Wealth Management in Bend, Oregon, and author of “Failure Is Not an Option: Creating Certainty in the Uncertainty of Retirement.”
Another option: investing in a Roth IRA or Roth 401(k) with earnings that have already been taxed so you can enjoy tax-free compounding and withdrawals.
Fees should also be minimized. The asset-weighted average expense ratio of actively managed mutual funds and exchange-traded funds was 0.75 percent in 2016, while passive funds had an expense ratio of 0.17 percent, according to investment research firm Morningstar.
“The difference affects an investor’s return and can make an enormous difference at retirement,” Rosell says.
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Stick with a long-term plan
It’s in the difficult times that future millionaires display their true colors. Having made their long-term saving and investing plans, they don’t deviate from them.
Of course, stock market ups and downs can test the most determined saver’s resolve. One such trough occurred during the Great Recession, when the Standard & Poor’s 500 index lost more than half of its value.
For example, if you started saving $158 a month in 2007, you would have put away about $3,800 by 2009, De Jong says. But if those savings had been placed in a fund tracking the market, they would have been worth much less because of market losses.
“Do you have the discipline to stick with your plan?” he asks. “Look at your account once a year, and you’ll almost always be happy. Look at it daily or weekly, and you’ll add stress to your life — possibly sabotaging your plan.”
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Ignore the headlines
Similarly, when sticking to a long-term plan, it pays to block out the noise. Markets can rise and fall day to day, and you’ll be tempted to react in a way that will be counterproductive to your goals.
“Ignore the business and marketing headlines,” says Jane Bryant Quinn, AARP financial columnist and author of “Making the Most of Your Money NOW.”
“The market always bounces back and goes higher, and profits people who stay with it,” Quinn says.
“There has never been a 15-year period when the S&P 500 index has lost money. … The day-to-day noise will always do you harm.”
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Become a conscious spender
One of the most striking differences between millionaires and everyone else is that millionaires practice conscious spending.
Before buying a costly item, step back and ask yourself several questions. How long have I wanted this item? How long have I seriously considered the purchase? How much joy have similar purchases brought me? If I charge it, will I still be paying for it long after the pleasure is gone?
When considering big-ticket items, enforce a 30-day waiting period before purchasing. This will ensure you spend money on things that you won’t regret buying.
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Live below your means
Staying the course is easier if you make living below your means a habit. After all, in order to save, you must spend less than you earn.
“If your standard of living is such that you can’t make it on your income, you’re living in the wrong way. Your bills are too high. You’re spending too much money. Your house is too expensive. You need to right-size your life by reducing,” Quinn says.
One way to live below your means is to make saving a game. Challenge yourself to go an extra day on the cash in your wallet, without charging items. Or hunt for coupons that offer the biggest discounts on movies and dining.
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Earlier generations of Americans had a fail-safe way of steadily piling up savings. They lived a lifestyle founded on delayed gratification. They reused items, repaired that old car, made do with what they had — and banked cash.
“Our grandparents did have a much better handle on where their money was going every month,” says Pamela Yellen, author of “The Bank on Yourself Revolution.” “But they didn’t have credit cards, ubiquitous ATMs and constant promotional messages telling them they had to have this or that to be happy, sexy, respected or popular.”
That messaging has made delayed gratification a lost art.
“If you fail to put aside your investment money first, there will always be something that seems urgent and crowds out your savings,” De Jong says. “The inducements to buy are nonstop and very effective.”
But those on their way to becoming millionaires know delaying gratification can still be gratifying. Watching your savings grow can be very rewarding, Yellen says. “You don’t feel deprived,” she says. “Your life is actually enriched.”
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Consider becoming an entrepreneur
Scan a list of the world’s richest people and you’ll notice a sizable amount of them created their wealth by starting a business.
While you likely won’t ascend to billionaire status, starting a business or a side job can help you pay down high-interest debt or boost your savings.
“Anybody can start a business,” says Phillip R. Christenson, chartered financial analyst with Phillip James Financial. “Take one of your hobbies or interests and see how you can use it to solve other people’s problems. To lower the risk, do it on the side while you continue to work a full-time job. It will take hard work, but entrepreneurship is one of the best ways to become a millionaire. And what could be better than becoming a millionaire doing something you love?”
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