Creating a retirement fund of $1 million may seem like a daunting task, but financial advisors suggest it’s an achievable goal for virtually everyone, provided they take the right steps. Contrary to popular belief, you don’t have to be a tech entrepreneur to accumulate wealth, says Brad Klontz, a financial psychologist and certified financial planner. He suggests even a fast-food worker could build wealth throughout their career.
Klontz, who is part of the CNBC Financial Advisor Council and the CNBC Global Financial Wellness Advisory Board, explains that the formula is straightforward. Every time you earn a dollar, save and invest a part of it towards your financial independence. By adopting this mentality, almost anyone can retire with a million dollars, regardless of their job.
Building a million-dollar retirement fund might sound like a monumental task, but it’s not as difficult as it seems, according to Karen Wallace, a certified financial planner and former director of investor education at Morningstar. The key is to start saving early, possibly in a 401(k) plan or an individual retirement account, which allows your investments to grow through the power of compound interest over several decades.
Interestingly, about 79% of American millionaires claim their wealth is self-made, according to a Northwestern Mutual poll. Only 11% inherited their wealth, while 6% got it from a windfall event like winning the lottery. The number of 401(k) millionaires in America grew by 9.5% between the second and third quarter of 2024, mainly due to gains in the stock market.
Financial advisor Winnie Sun provides an example of how consistent saving can lead to wealth accumulation. Assume a 30-year-old earns $60,000 a year after-tax. If they save $500 a month, or 10% of their annual income, they would have $1 million by age 70, assuming average market returns of 7%. This calculation doesn’t consider other financial boosts like company 401(k) matches, bonuses or pay raises.
“In 40 years, you’ll have over $1 million, just by saving $500 a month,” says Sun, co-founder of Sun Group Wealth Partners and a member of CNBC’s Financial Advisor Council. She also stresses the importance of avoiding debt, keeping expenses low, and starting with a low-cost index fund like one tracking the S&P 500.
However, the right amount of savings will vary for each individual. A common rule of thumb, known as the 4% rule, suggests that a typical retiree can draw around $40,000 a year from a $1 million nest egg without running out of money in retirement. However, Sun suggests that households aim to save 15% to 20% of their income, which is a guideline often recommended by financial planners.
The percentage of income saved will depend on your personal wealth goals and how quickly you want to achieve them, says Klontz. Some people aim for a 30% savings rate, while others aim for close to 90%. This high savings rate is common among those following the Financial Independence, Retire Early (FIRE) movement.
While it’s important to save for the future, it’s also crucial to enjoy the present. Allocating 20% of household expenses towards things that matter most to you can help strike a balance between saving for the future and enjoying the present. After all, we weren’t meant to only save money, but to also enjoy a good quality of life, says Sun.
