One day when I was in my late 20s and starting a job at a major newspaper chain, the treasurer pulled me into his office to explain what I'd be missing if I failed to join the company's 401(k) plan — something totally foreign to me at the time.
The company was matching 50 percent of whatever part of my earnings I was willing to put into Knight Ridder's retirement savings program, up to 6 percent of my total pre-tax paycheck, with taxes coming out at retirement.
"There is no better investment in the world," he said. "You're being guaranteed a 50 percent return on whatever you decide to invest, up to 6 percent of salary, with each and every paycheck. You will never get a better deal anywhere, ever."
And it's true: Putting away as much of your salary as you can each pay period and maxing out your 401(k) plan is the first critical step toward saving $1 million or more for retirement, said Leon C. LaBrecque, CEO of LJPR, a registered investment advisor in Troy, Mich.
Defined contribution programs — often 401(k)s — have largely replaced defined benefit pension plans, where employers take a more paternalistic approach to their workers.
Just 28 percent of workers surveyed by the Bureau of Labor Statistics — including those in the private and public sectors, but not federal employees — had access to traditional defined benefit pension plans, a March 2014 survey concluded.
On the other hand, 56 percent had access to 401(k)s or similar programs in which employees contribute savings on their own and often invest in vehicles of their own choosing. But only 68 percent of employees able to contribute to 401(k) plans were taking advantage, according to the survey.
Why You Probably Need at Least $1 Million for Retirement
Do I really need $1 million in retirement savings? Can I really reach that goal?
The answer to the first question depends on your lifestyle and the extent you want to replicate that in the future — that is, how much of your current income you hope to replace a few decades down the road. In many cases, yes, you might need $1 million or more in retirement savings if you are not going to continue working.
And yes, getting there is doable if you start early enough, know how you much to put away and understand how to withdraw funds in a disciplined fashion, according to LaBrecque and other financial advisors.
"If you are living in a metropolitan center, are middle class making at least $75,000 per spouse, you probably need $1 million or more," said Todd Rustman, founder of Clarity Capital Partners in Newport Beach, Calif.
Calculating Your Annual Retirement Income
Once you have retired with that level of savings, he said you would most likely be able to draw 4 percent to 5 percent or $40,000 to $50,000 a year to live on, markets permitting, and leave the principle intact so it will last a lifetime.
If $40,000 to $50,000 a year seems paltry, you will need to save more or earn more during your employment. This example excludes Social Security payouts, but some pundits anticipate that those benefits might go down for today's younger workers.
Moreover, at a time when large swaths of the population have essentially nothing to speak of in savings and investments — and when health care expenses are rising — it's well worth thinking about how much you should be putting away to make your retirement comfortable.
The Employee Benefits Research Institute's 2015 Retirement Confidence Survey found that 57 percent of American workers have less than $25,000 put away for the future, excluding the value of their primary home and any defined benefit plans. A disturbing 28 percent reported less than $1,000 in savings, while 14 percent have saved $250,000 or more.
How You Can Save $1 Million for Retirement
The above figures suggest it must be very hard for middle-income people to amass the savings needed for a secure retirement, but that is not the case.
For instance, said LaBrecque, a person making $50,000 a year and saving $5,000 annually in a 401(k) and/or other investment vehicles yielding a fairly modest 7 percent compounded annually will save more than $1 million if he starts saving at age 25 and ends at age 65.
"The million will provide, at 4 percent withdrawals, $40,000 a year," he said.
"Another individual earning $100,000 a year and saving the same $5,000 will accumulate the same amount," but the replacement rate is a far cry from the minimum 75 percent that most experts — including LaBrecque — call for.
"Pundits think 75 percent," he said, "but I like to shoot a little higher, like 80 to 85 percent with a little extra thrown in as inflation protection."
LaBreque's replacement threshold reflects the cost of medical expenses and that retirement might run more than 30 years.
One Real-Life Example
LaBrecque has helped clients to save well over $1 million for their futures and believes he has found a solid formula: saving a larger percentage of income.
"Just give me something simple to do," a client, then in his early 40s, asked him in the early '80s. "I said save 18.7 percent of your money in the Vanguard Windsor fund." In 20 years, the client had amassed a whopping $2.5 million.
The client, who had all of his Vanguard statements stacked up unopened, was happily surprised. With the ability to withdraw roughly $100,000 each year — once more, taking just 4 percent of his total — his replacement rate was a full 100 percent.
"I've been on the 18.7 percent solution ever since," said LaBrecque, noting that figure includes employer contributions, "so if your employer matches 5 percent, your job is to save just 13.7 percent."
So, an individual making $50,000 a year and investing 18.7 percent of salary for 30 years with an 8 percent rate of return would also have that same $1 million nest egg and be able to withdraw $40,000 a year.
Key Steps to Take
To save $1 million or even much more for retirement, experts also recommend taking all of the following steps.
Check Out Your Match
Go to your benefits director and find out how much your employer will match in your 401(k) or other retirement savings plan, said Rustman, and put as much money into the plan as you can to earn the maximum match. "Free money is free money," said LaBrecque, "and the match is free money."
Save Half of Any Raise You Get
If you get a 2 percent raise, increase your 401(k) by 1 percent, LaBrecque suggested. Keep doing this. "Don't just increase the sum you put into the plan, but increase your percentage contribution as well," he advised.
Refrain From Pulling or Switching Investments When Markets Tumble
"Don't quit. Don't stop," he said. "I've seen people stop their 401(k) in down markets. Awful idea. Down markets are sales. We buy steak on sale and clothes on sale. Make investments on sale." In other words, a down market is a chance to buy at a discount.
Invest Your Tax Refund
"About 80 million Americans have a savings plan where they save money after-tax and earn no interest," said LaBrecque. "It's called an income tax refund. I see folks who claim they can't save for retirement, yet get a $2,600 refund." Stash the refund into a 401(k) plan and stash the tax savings from switching from a refund to a 401(k) in a Roth individual retirement account.
Invest in Yourself
Rustman suggested taking classes, earning an MBA or doing whatever you can do to increase your value as a professional. You will earn more and can therefore invest more, and your employer might pay for that training.
From GobankingRates.com: How to retire with at least $1,000,000