When
asked how to become a millionaire, most people would say
"Invest in Real Estate!" While this may partially
get you there, you might have the position where you have
a Cash Rich house but a Cash Stripped bank account. In
order to retire with a good standard of living, you need
to balance out real estate investments and have enough
401k retirement
plan savings.
In the year 2004, the average
household savings in USA averaged 0.8% of disposable income
(income after all your expenses have been paid off). This
rate has been the lowest since the Great Depression and
the past 3 decades have seen savings rates of over 7%.
Why is this 0.8% rate so low? Is it because Americans
are just bad at saving money, or too much of our disposable
income is going towards paying off our homes? In order
to reach your goal of having $1 million upon retirement,
here are a few suggestions:
Utilize your 401k Retirement
Plan to the max by contributing as much as you can. The
maximum 401k contribution limit for 2005 was $14000. Furthermore,
you can also contribute $4000 to a Roth IRA or a Traditional
IRA for the year 2005 ($4500 for people over the age of
50 under the Catch Up Provision).
For example, lets take an
average investor by the name Peter. Peter is 40 years
old and makes $60,000 a year Gross Salary. Peter contributes
$4000 a year into a Roth IRA account, and contributes
5% of his salary to a 401k plan. He also takes advantage
of the fact that his employer is willing to make a 5%
Match Up Contribution of his Gross Wage into his 401k
Retirement Plan. Here is a summary of the above data:
Self Contributions:
5% x $60,000 = $3000 |
Annual Contributions
of $4000 |
Employer Match
Up Contributions:
5% x $60,000 = $3000 |
No
Employer Match Up Contributions |
$6000 Per Year x 25
years @ 10% Interest Compounded Annually = $649,090.59
|
$4000
Per Year x 25 Years @ 10% Interest Compounded Annually
= $432,727.06 |
Therefore, if you add $649,090
+ $432, 727 =
You are now officially a
Millionaire!
Now lets look at a different
scenario. Imagine Peter had started saving towards his
retirement at a very young age. Here is a table summarizing
the data:
| Starting Age |
Annual Contributions |
Annual Return |
Value at Age 65 |
| 25 |
$10,000 |
10% |
$4,868,518.11 |
| 30 |
$10,000 |
10% |
$2,981,268.05 |
| 35 |
$10,000 |
10% |
$1,809,434.25 |
| 40 |
$10,000 |
10% |
$1,081,817.65 |
| 45 |
$10,000 |
10% |
$630,024.99 |
| 50 |
$10,000 |
10% |
$349,497.30 |
| 55 |
$10,000 |
10% |
$175,311.67 |
From the above table, you
can see that if Peter started contributing $10,000 from
the age of 25, he would have a huge lump sum of $4,868,518
at the age of 65 (upon retirement). You bet, $4.8 million
is a huge sum of money to have upon retirement!
However, if Peter started
investing at only 45 years old, he would only have $630,024
at the age of retirement (65).
