THE 1st AND MOST IMPORTANT RULE-
Start saving! If you are already saving...great job! Now let’s make sure you are saving the proper amount. To get to a million dollar retirement portfolio it’s not as hard to get to as you might think. Understand there will be ups and downs however staying the course during those down turns will pay-off over the long-term. ‘Slow and steady wins the race’. While starting to save early is always advised, it’s not always possible with prior student debt, lay-offs, children, emergencies, etc. So I made the assumption that a couple didn’t start saving until they were 40 years old, quite a bit older than many financial articles write about – albeit probably more realistic. So let’s get started...
We need to make some assumptions, of course your numbers might be slightly different, but this will give you an idea of the process to figure out what you need to do.
With the above assumptions, a couple who starts saving at age 40 saves 10% of their income for 25 years which earns an average return of 7% will reach their goal of a $1 Million retirement portfolio. I call this the 25/10/7 plan. Save for 25 years, 10% of your income, portfolio earns 7% per year.
SOME POINTS TO REMEMBER-
Click below for a 1-page PDF of this article which includes a graph which shows how much you need to save on a monthly basis depending on when you start saving.
Paul R. Rossi, CFA