The Million-Dollar Retirement Plan
Emily Brandon

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Achieving millionaire status is a noteworthy financial goal. But saving $1 million doesn't necessarily mean you are ready to retire or that you will be able to afford a lavish retirement lifestyle. Here's what it takes to save that amount over a working career and how much income you can expect a $1 million nest egg to provide in retirement.

Making your first million.

Many people should be able to save $1 million for retirement if they start saving early enough. A worker who saves $5,500 per year beginning at age 30, gets a $1,500 401(k) match each year, and earns 7 percent annual returns will have $1,014,640 by age 65. However, someone who waits until age 40 to start saving will have to tuck away closer to $14,000 a year to reach $1 million by age 65, assuming the same 401(k) match and investment returns.

Those who do not get an employer 401(k) match or don't consistently save in a 401(k) plan will need to save even more on their own. "You may have to adjust for time frames when you were not contributing to your 401(k), such as when you are saving for a house or you change jobs," says Mark Fuller, president of Fuller Wealth Management in Broomfield, Colo. "Life happens, and you have got to be able to make some mid-course corrections along the way." Excessive fees and investment costs, 401(k) waiting periods and vesting schedules, and taking early 401(k) withdrawals or loans can also make it more difficult to become a millionaire. "It sounds easy and it sounds good on paper, but in actuality it is tough for people to do," says Doug Kinsey, a certified financial planner for Artifex Financial Group in Oakwood, Ohio. "People need to really keep their transaction costs to a minimum. If you shave off a couple of points a year in expenses, that goes a long way toward saving a million for retirement."

What $1 million will generate.

We associate the word "millionaire" with luxury. Spread out over a 30-year retirement, $1 million will likely make you comfortable in many parts of the country, but not especially wealthy. "I have clients who have got a million dollars in retirement and they don't feel wealthy," says Jay Hutchins, a certified financial planner for The Wealth Conservatory in Lebanon, N.H. "It's not enough that you can put it in the bank and draw half a percent of income and live off it. You have to invest it and you have to take on risk." If you draw down 4 percent of your $1 million nest egg each year, you will receive about $40,000 annually for 30 years, before adjusting for inflation. To that amount you can add any Social Security or pension income you expect to receive. But you will likely need to subtract taxes, especially if most of your savings is in tax-deferred accounts including 401(k)s and IRAs, and account for inflation.

Making it last.

You may have to adjust your withdrawal strategy in retirement as new expenses arise or cut back on discretionary spending such as travel or entertainment in years when your investments perform poorly. There's also inflation, will can erode your spending power in retirement. Most people have one major source of inflation-adjusted income: Social Security. Other strategies for staying ahead of inflation include holding Treasury inflation-protected securities, a government bond that promises a rate of return above inflation, certain inflation-adjusted annuity products, some exposure to stocks or stock-based mutual funds, and owning real estate. "If you're living off $50,000 a year today, once you factor inflation in there, you're going to need more in retirement," says Fuller. Depending on what you estimate your expenses will be in retirement, he says, "you need to make it a goal to have a seven-figure portfolio when you retire."

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