How millionaires retire, according to financial experts

Building a $1 million nest egg may seem like an impossible feat.

But financial advisors say that by taking certain steps, building up this kind of retirement wealth is within the reach of just about anyone.

“You might think, ‘To get rich, I have to become a Silicon Valley entrepreneur,'” says Brad Klontz, a financial psychologist and certified financial planner.

In fact, you can work at a fast food restaurant your whole life and build wealth, said Klontz, a member of the CNBC Financial Advisor Council and the CNBC Global Financial Wellness Advisory Board.

The math is easy, he said.

Klontz said that for every dollar you receive, you should save and invest a percentage toward “financial freedom.”

With this mindset, he says, “you can work almost any job and retire a millionaire.”

Saving $1 million may sound like a “tough job,” but “it may not be as difficult as you think,” says Karen Wallace, CFP and former Director of Investor Education at Morningstar in 2021 I wrote it in 2016.

The key, experts say, is to start saving early, perhaps in a 401(k) plan, individual retirement account or tax-brokered account. This allows investors to take advantage of the magic of compound interest over decades. In other words, “let your investments do as much of the heavy lifting as possible,” Wallace writes.

About 79% of American billionaires say their net worth is “self-made,” according to a Northwestern Mutual poll released in September. According to a survey of 4,588 U.S. adults conducted from January 3 to January 17, 2024, only 11% said they had inherited their wealth, and only 11% said they had inherited their wealth from unexpected events such as winning the lottery. 6% of people said yes.

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According to Fidelity Investments, the largest manager of workplace retirement plans, 544,000 Americans had 401(k) balances of $1 million or more as of Sept. 30. There were also more than 418,000 IRA millionaires.

In fact, the number of 401(k) millionaires increased by 9.5%, or 47,000 people, between the second and third quarters of 2024, largely due to the rise in the stock market.

Financial advisor Winnie Sun shares an example calculation that links $1 million in wealth to consistent savings.

Let’s say a 30-year-old has an annual income of $60,000 after taxes. If they could save $500 a month, or 10% of their annual income, they would have $1 million saved by age 70, assuming an average market rate of return of 7%, she said.

This doesn’t take into account any financial factors that might increase your savings over the period, such as company 401(k) matches, bonuses, or raises.

Sun, co-founder of Irvine, Calif.-based Sun Group Wealth Partners and a member of CNBC’s Council of Financial Advisors, said, “In 40 years, you will have more than $1 million.” “But it would only cost me $500 a month.” .

It’s also important to avoid debt, which is probably the “biggest hole” in building savings, and avoid adding too much to your expenses, Sun explained.

Sun said timing is more important than perfection.

She recommends starting with a low-cost index fund, such as one that tracks the S&P 500, which spreads your savings across the largest publicly traded companies in the United States, and building from there.

“Even just waiting a year can make a dramatic difference in getting to that $1 million point,” Sun said. “Stop and take action.”

Of course, $1 million in retirement benefits may not be the right amount for everyone.

An oft-cited rule of thumb (known as the 4% rule) states that the typical retiree takes less than $1 million per year from their nest egg to safely assume they won’t run out of money in retirement. You can withdraw about $40,000. (Annual withdrawals are adjusted annually for inflation.)

For many people, this amount will be covered by Social Security.

Fidelity suggests savings goals based on your income. For example, workers should aim to save 10 times their annual income by age 67 to ensure a comfortable retirement.

Ideally, households should aim to save 15% to 20% of their income, Sun said. This is a rule of thumb often cited by financial planners.

Klontz said the percentage depends on how much wealth you want and how quickly you want to get rich.

He personally aims for a 30% savings rate, but knows people who have achieved closer to 90%. Saving such a large portion of your income is a common theme in the so-called FIRE movement, which stands for financial independence and early retirement.

how do they do it?

“They don’t leave their parents’ homes, they keep everything to a minimum, they don’t buy new clothes, they take the bus, they shave their heads instead of paying for haircuts,” Klontz said. “If you want to get to your destination faster, there are all sorts of hacks you can do.”

Of course, it’s stressful for those who want to enjoy life today and save for tomorrow.

“We weren’t just trying to survive and save money,” Sun said. “There has to be a quality of life and a happy medium.”

One strategy, Sun says, is to allocate 20% of your household spending to the things that are most important to you, such as big vacations, luxury cars, and the latest technology.

When it comes to the remaining 80% of household expenses, she says, it’s a good idea to make some concessions, or “save and save.” This allows savers to feel like they’re not reducing their quality of life, she says.