How to do anything but land a millionaire retirement

Owith the S&P500 on the brink of a bear market and some high-growth companies down more than 90%, reaching millionaire status by the time you retire can seem like a crazy goal. In fact, most bear markets plant the seeds for the next big rally. Unless you believe this crash will mark the end of capitalism and entrepreneurship, chances are this one will too.

Now – when the market is down sharply from its highs – is the perfect time to put in place your plan to achieve millionaire status when you retire. After all, every dollar you invest today buys far more stocks than it did near the market highs. More action translates directly to a broader base that participates in any rally that follows. It can actually end accelerating your way to millionaire status.

Yet building such a big nest egg is a journey that takes time. Although there are no guarantees left in the market, there is a simple and proven four-step approach that can give you an excellent chance of anything but landing a millionaire retirement.

Image source: Getty Images.

Step 1: Get your own financial house in order

A big challenge with bear markets is that they often bring job losses with them. Your bills won’t disappear just because your job is working, and if all your money is tied up in stocks, you might be forced to sell near market lows just to make ends meet. It won’t help you on your way to millionaire status and could instead set you back.

One of the main tools in your arsenal is an emergency fund. With three to six months of living expenses paid in cash, you can better handle a short-term interruption to your income. With interest rates well below inflation, you don’t want also lots of savings, but somewhere in that three to six month range at least gives you a buffer to help you make adjustments.

In addition, controlling your debts is an important element in being able to invest successfully. You don’t have to be completely in debt to invest, but your debts should be reasonable. Reasonable debts are those with low interest rates where you can state a clear value for your future due to that debt. Additionally, your total payment levels should be low enough that you can easily cover them and still have some wiggle room in your budget each month.

If you’re not there yet, the debt avalanche approach is the most effective way to pay off your debts. To use it, line up your debts from the highest interest rate to the lowest interest rate. On all but your highest interest rate debt, pay the minimum. On this highest interest rate debt, pay as much as you can above the minimum until it is paid off. Once it is paid, take the money you had paid and add it to the amount you put on your New debt at the highest interest rate.

Continue until your total indebtedness reaches this reasonable level.

Step 2: Take advantage of all the free money you can

If you get a match for contributing to your 401(k) at work, investing enough money in this plan to maximize your match is hands down the first investment you should make. Adding your boss’s money to yours earns you even more on your behalf.

Once your match is maxed out, it usually makes sense to keep contributing to your 401(k) as long as it doesn’t charge high fees and offers strong index funds with low expense ratios. If you’re under 50, you can generally contribute up to $20,500 to your account in 2022. If you’re 50 or older, that amount increases to $27,000.

In addition to matches, 401(k) plans also give you tax benefits. In any eligible 401(k), your money is tax-deferred while it’s in the plan. In Roth 401(k) plans, you can withdraw money in retirement tax-free. In traditional 401(k) plans, you get an immediate tax deduction for the money you contribute, but the money is taxed when you withdraw it.

Between your boss’s money and tax-benefit money, 401(k)-style plans offer great ways to build wealth. If you’ve maxed out your 401(k), participation is too expensive, or you don’t have one available, you can also contribute to an IRA. IRAs are also available in traditional and Roth varieties, but the contribution limits are lower. In 2022, you can contribute up to $6,000 if you are under age 50 or $7,000 if you are age 50 or older.

Step 3: Invest in broad stock indices

Unless you want to get heavily involved in your investments, by far the easiest approach to building wealth over time is to place each contribution in a large, low-cost stock market index fund. This simple approach tends to beat the vast majority of professional fund managers on Wall Street over time, and it’s available for nobody eligible to invest in the US stock market.

Step 4: Keep on going

The following chart shows how many years it will take to reach $1 million from scratch, based on how much you can save each month and the rate of return you earn along the way.

Monthly investment

10% annual return

8% annual returns

6% annual returns

4% annual return

$2,833

13.8

15.2

17.0

19.5

$2,208

15.7

17.4

19.8

23.0

$1,500

18.9

21.3

24.5

29.3

$1,000

22.4

25.5

29.9

36.7

$500

28.8

33.4

40.1

51.0

$300

33.7

39.4

48.0

62.5

Data source: author.

That $2,833 number is what a person age 50 or older who maxes out both a 401(k) and an IRA can set aside tax deferred. The $2,208 one is valid for people under 50. If you’re not able to invest that much, even as little as $300 a month – around $10 a day – can give you a reasonable path to millionaire status when you retire. . If you can’t immediately reach your target savings rate, start with what you can and increase your savings as much as you can.

start today

As the table shows, the more time you have before retirement, the less you need to save each month to build up a comfortable nest egg when you get there. The earlier you start, the more valuable time you have to execute your plan. So start today and give yourself the best possible chance of anything but landing a millionaire retirement for yourself.

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Chuck Saletta has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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