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No. 1 way to retire rich

By Judy Martel · Bankrate.com
Sunday, April 22, 2012
Posted: 3 pm ET

It may be a little late for some, but the No. 1 way for the average person to retire rich (if you haven't won the lottery, inherited a bundle or sold a successful business) is to become a hoarder while you're young. In other words, begin saving and investing in your 20s and don't stop.

The second biggest factor in securing a comfortable retirement is using expert financial counsel, not just to help you become rich, but to make sure you stay that way once you stop receiving a paycheck. This advice comes via a report by the Financial Services Institute Inc. and Financial Services Roundtable, two advocacy and education organizations.

So, going back to rule No. 1: save and invest early and often. Sure, other factors, such as taxes, types of investments and market volatility, will all come into play in your planning, but there's no getting around the magic of compounding. This Bankrate calculator shows you how it works. Suffice it to say, the longer the time horizon, the faster your money will grow for you.

And even when the stock market is weak, by sticking to rule No. 1, you're buying stocks at cheaper prices. If you are well diversified among cash, equity and fixed income and don't dump everything into one asset class (and let's not forget, your home is an investment, not just a place to live), history tells us you will make money. That's already proven true coming out of this latest deep recession. Those who stayed invested in the stock market have largely recovered financially or come out ahead of where they were five years ago. Housing has yet to recover and portfolios made up of all fixed income are gaining negligible yield and likely losing to inflation.

So what if you didn't follow the No. 1 rule -- is it too late? You may have to work longer, and you may not end up as rich as you would have if you started when you were younger, but there are some ways to begin catching up.

If you have a retirement plan at work, such as a 401(k), maximize your contributions. If you can contribute to an individual retirement account, do that as well. The maximum contribution for those 50 and older is $5,500 per year in a 401(k) and $6,000 per year in an IRA. Make sure you have some money allocated toward aggressive assets, depending on your age and your needs. This is where an independent financial adviser will be a big help.

Control, and eventually eliminate, debt. This could get painful, but do everything you can to pay off debt, especially high-interest debt, then save what you can after that. Even in retirement, save to the extent you can while keeping some money in aggressive assets, so you continue to build wealth even as you spend it.

Bankrate has several calculators to help you plan for your own retirement. Here are a few of them:

401(k) savings calculator

Don't delay your savings

Compare your savings rate with the national average

Retirement planner

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3 Comments
Judy Martel
April 23, 2012 at 9:42 am

Yes, the maximum contribution limit for a 401(k) is $17,000, but I was referring to the catchup limit on those accounts, for those over age 50. Here is the wording from the IRS, to clarify:
"If you participate in a traditional or safe harbor 401(k) plan and you are age 50 or older:
The elective deferral limit increases by $5,500 for 2011 and 2012."

CP
April 23, 2012 at 9:08 am

Rich is a relative term, but the #1 way to retire comfortably is to not spend money you dont have while you are working. Live within your means and put money in the bank. It isnt rocket science.

baselle
April 22, 2012 at 9:21 pm

Isn't the maximum catchup contribution for 50+ the $5500? Isn't the max contribution for a 401K (or 403B) $17,000 as long as you are under a certain AGI?