The average American earns about $ 51,480 a year. That’s based on the $ 990 median wage for the second quarter of 2021, according to the U.S. Bureau of Labor Statistics.
If you earn an average salary, it can be impossible to save and invest enough to retire a millionaire, especially with the rising cost of housing, baby care, and groceries. But a Schwab The Retirement Plan Services study found that the average 401 (k) plan participant believes they need the embarrassing $ 2 million to retire.
Think $ 2 million is unattainable? Here’s how to get there on the average American salary.
1. Plan to invest for at least 35 years
Most people with average income are unable to invest a large percentage of their salary. That’s why investing in the long run and giving your money plenty of time to compound becomes most important.
If you invest $ 525 a month for 35 years with an annual return of 10%, you have over $ 2 million in retirement. That’s only about 12% of the average salary.
You can still get $ 2 million if you don’t have a 35 -year horizon, but you still have to invest every month. Considering the same annual return, you need to invest about $ 875 a month-more than 20% of the worker’s average salary-to get the same results.
2. Get your full 401 (k) match
It’s easier to be a multimillionaire on the average salary if all the money doesn’t come out of your pocket. That’s why taking full advantage of your company’s 401 (k) match isn’t a brainstorm.
A common pairing scenario is 50% of your contributions to 6% of your salary. If your employer follows this formula, you’ll have to contribute about $ 515 a month, but you’ll get over $ 770 per month to invest. An automatic 50% return on your investment is a great pass. If you’re late starting to invest, finding a job that offers a 401 (k) game can help you make up for lost time.
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3. Aggressive investing
To achieve a 10% return, you need to invest fairly aggressively. That means you need to invest primarily in stocks, rather than bonds, especially if you have a few decades until retirement. While stocks carry greater risk, the stock market has always recovered from declines. You can switch to more conservative investments if your retirement is less than five years old.
4. Create a six -month emergency fund
While investing is the only realistic way to reach $ 2 million in average salary, having a cash buffer can help protect your future millions. Aim to build a six -month emergency fund so you can withstand loss of income or large expenses without affecting your investments.
The damage to your net worth can be lasting if you have to sell investments at a loss because you need the money. What’s more, if you withdraw money early from a retirement account, you always have income taxes and a 10% penalty.
5. Invest your salary increase
You may be earning an average salary now, but that doesn’t mean you’ll get an average salary forever. Make a habit of budgeting and living below your income. Commit to investing more money every time you get a raise. For example, you might plan to invest 50% on your next pay bump and spend another 50%.
Consistent investing is only part of the equation of becoming a daily millionaire. Avoiding lifestyle inflation is just as important in your journey to wealth creation.
This article represents the opinion of the author, who may disagree with the “official” position on the recommendation of a premium consulting service Motley Fool. Motley mi! Asking an investment thesis – even one of ours – can help us all think critically about investing and make decisions that will help us become smarter, happier, and richer.