So you want to be a millionaire?

When I’ve met with clients for the last few tax seasons, I’ve made it a goal to perform a “financial check-up” on my clients. Many of them don’t meet with financial advisers, so the yearly meeting with me is as close as they are going to get to having a finance professional help guide them.

Some are on the path to retirement and financial freedom already, others are just getting started, and then there’s the group in the middle who have some saved but need to increase their savings rate to hit their desired goals.

One common question I ask clients is how much they think they need in their retirement account to retire comfortably around 65, and the most common answer I get is $1 million. Whether this is right or wrong is another conversation altogether, but it got me thinking that having $1 million in a retirement account is much more attainable than most people realize, depending on age.

For this exercise, we are going to use 7% as the inflation adjusted rate of return as that’s been the average for the last 50-60 years. We will also use a starting investment of $0, even though many of you have something saved already, just to show that it’s never too late to start. We’re also going to use 65 as the desired age to reach $1 million in investments. Below is a list of starting ages, and the corresponding monthly necessary contribution to reach $1 million by age 65.

22: $269

30: $497

40: $1,135

50: $2,970

As you can see, the longer you wait, the more costly saving for retirement gets. When you start saving $269 a month at age 22, the total contributions towards the $1 million is roughly $139,000 out of pocket. Investment returns cover the other $861,000. However, if you wait until 40, the required investment becomes roughly $341,000.            

What’s the biggest takeaway from this? It’s never too late to save $1 million, but it becomes much more expensive to do so the longer you wait. You may be past the age where saving $1 million is practical for you, but who doesn’t know a recent college graduate that you can share this information with?        

Disclosure: Becoming a millionaire doesn’t require $1 million in investment assets. A net worth of $1 million is taking your total assets (real estate, investments, bank accounts, etc.) and subtracting your total liabilities (mortgage, car debt, credit cards, etc.). The above exercise is strictly talking about saving $1 million in retirement assets.