“There are far more important things in life than making a putt or missing a putt or winning a championship or losing a championship.” – Bernhard Langer

Let’s say your goal is to save a million dollars by the time you retire. For many people, that sounds like a task too daunting. What are you picturing right now? If you are imagining squirreling away money for decades and holding it in cash (which has returned 0.4% after inflation over the past 90 years), you would need to sock away a lot of money to get to a million. And along the way, your budget could be really tight.

Change your mental picture.

Instead, invest in your 401(k) (or another retirement savings account like a Roth) with the goal of having a million dollars in 30 to 40 years. Although it may sound like it’s just semantics, it’s actually much easier–especially if you start saving early–to let your investments do as much heavy lifting as possible.

What Does It Take?

You can contribute up to $19,000 to a 401(k) in 2019 and the Roth is now allowing $6,000 (plus another thousand if you’re over age 50). But the good news is that you don’t have to save anywhere near that much per year if your goal is to have a million dollars at retirement age (65), provided you start early. The earlier you start investing, the longer your investment will compound (your money will grow exponentially). You can do the math yourself if you have a financial calculator, but in case you don’t (or you don’t have it handy), here’s an example of a 25 year-old who has not yet begun saving.

How to Save $1,000,000 by Age 65

Amount saved $0 (PV on financial calculator)
Amount we want to have saved by 65 $1,000,000 (FV on financial calculator)
Annualized market return expectation 7% per year (I on financial calculator)
Years until 65 40 (N on financial calculator)
Yearly contributions to 401(k) required $5,009 (PMT on calculator)
Dollar amount contribution per paycheck $209 ($5,009/24 months)


What about that market rate of return? How do I know what stocks will return over the next 40 years? The truth is I don’t, and neither does anyone else. If we did know, we would know exactly how much we need to save to reach our goal. But since we don’t, we will make a conservative educated guess instead.

Here’s how I came up with 7%.

Over the past 90 years, stocks (as benchmarked by the S&P 500) have returned about 10% per year on average. Adjusted for inflation (which is referred to as the “real” return), stocks have gained around 7% per year on average. Does that mean the S&P 500 will earn around 7% after inflation in every year going forward? Of course not–this is just the smoothed-out, average annual return over the past 90 years. Importantly, there is just no accurate way to guess what stocks will do over short-term periods. Over a multi-decade period, though, 7% per year is as reasonable an estimate as any.

Again, there are no guarantees. If you want to be more conservative in your estimate, you can use 6% or 5% as the return for stocks. The result of lowering the growth rate will be that the recommended savings amount rises: In other words, the market won’t do as much heavy lifting and you will have to save more. The downside of saving more in the present is that you may have to keep a pretty tight budget, which can be challenging. The upside, obviously, is that you’ll have more money saved.

Don’t forget: Part of your contribution might come from your employer in the form of a company match. Let’s say your employer matches the first 5% of your 401(k) contribution at $0.50 on the dollar. That means that if you save at least 5% of your paycheck ($2,000 if your base salary is $40,000), your employer will kick in $1,000. So that means that you only have to save $4,000 per year (10% of your salary) to get into the ballpark you want to be in.

Is a Million Going to Be Enough?
Now that we’ve figured out how to save a million dollars, we should ask ourselves if that’s even an appropriate target. It’s a considerable amount of money and it’s a lot more than many people have when it comes time to retire. But if you have many decades until retirement, inflation takes a toll and you might find that a million dollars just isn’t a whole lot of money.

The goal in retirement savings and drawdown is to maintain your current lifestyle, plus or minus some expenses–maybe more travel spending but less money required for commuting and new clothing. Many people focus on replacing 80% of their preretirement paycheck. Remember, too, that Social Security will provide some income in retirement. Also–and this is something that people sometimes forget–you still have some earning power in retirement, especially if you maintain a modest allocation to stocks in your portfolio.

For that reason, it’s recommended that you base your savings goal on your household’s anticipated cash flow needs rather than on an arbitrary number. The problem with homing in on a dollar amount is that it might be a lot more or a lot less than you will need in retirement, depending on your current salary and lifestyle.

Saving a considerable amount for your retirement isn’t impossible. It can be difficult, of course–especially in the early stages of a career when incomes tend to be lower. But hopefully you can afford to sock away $100 to $200 per paycheck. Though for some it may be out of reach, for others it may be more achievable than they thought.

Give us a call if you are having trouble starting the process, haven’t heard from your advisor often enough, or feel like you’ve missed out on the stock market rally this past decade.


Blake Parrish, CFP®
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com

Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”