Today's online news brought the wonderful story of a Brattleboro, Vt., janitor and gas-station attendant named Ronald Read, who died in 2014 at age 92, having quietly saved $8 million (here's how). When the will was finally probated, neighbors learned that the unassuming man driving to the store in his second-hand Yaris had left $6 million to his local library and hospital.
When you’re making minimum wage, the concept of stashing away $1 million (much less way more) for retirement might seem like a pipe dream. After all, the federal minimum-wage rate has been stuck at $7.25 an hour since 2009. Over the course of a 40-hour workweek, a minimum-wage earner is only bringing in $290 a week – just over $15,000 a year. (For more, see Can a Family Survive on the U.S. Minimum Wage?)
On the surface, the idea that you can achieve a $1 million retirement when you’re pulling in a minimum-wage paycheck seems impossible, but it can be done. Here’s what you need to know if you’re ready to make it a reality. (For more, see 6 Simple Steps to $1 Million.)
For a $1 Million Retirement, Start Saving Early
If you want to make it to the $1 million mark on a minimum-wage salary, you need to get a head start on saving as soon as possible. People who start saving for retirement in their teens or 20s are going to have a much easier time getting close to their goal than those who wait until their 30s or 40s.
When you have a longer horizon until retirement, you have the power of compound interest on your side. Essentially, this means you’re earning interest on your interest over time. If you’re investing steadily and earning a decent rate of return, the compound interest has a significant impact on the sum with which you end up.
Here’s an example. Let’s say you invest $5,000 in a Roth IRA at age 18. You invest an additional $200 a month until age 66, earning a 7% annual rate of return. By the time you retire, your balance would be more than $1,035,00. By comparison, someone who starts saving at age 30 with the same $5,000 initial investment and $200 monthly investment would only have around $439,000 at age 66. The lesson? The longer you wait, the more you shrink your savings in the long run. (For more, see Why Investors Should Care About Compound Interest.)
Take Advantage of Free Money
If you’re fortunate enough to be working in a minimum-wage job that offers a 401(k) or a similar employer-sponsored retirement plan, you’ve got a huge advantage when it comes to saving. That’s because you may be able to boost what you’re putting toward retirement through an employer match.
Let’s look at another example. Assume that you’re making $15,000 a year. You contribute 15% of your pay to your 401(k), and your employer matches 100% of what you put in, up to the first 6%. If you do that from age 25 to age 65 and earn a 7% annual return each year, you’d have more than $650,000 when you retire. (For more, see 4 Ways to Maximize Your 401(k).)
Granted, that’s short of $1 million, but if you’re really industrious and able to sock away extra money into an IRA, you could make up the difference. If you get a $2,000 tax refund every year and park that in a Roth for 40 years, for instance, that’s another $427,000 you’d have for retirement, assuming a 7% return.
Choose the Right Investments
The scenarios listed above assume a best-case scenario, where you’re investing a substantial percent of your pay and earning decent returns the entire time. As no one can predict with precision what the market’s going to do, however, you have to be strategic about how you invest.
Focusing on stocks involves taking on more risk, but it’s also the way to get better returns. Bonds are safe, but they’re not going to generate double-digit earnings. If you’re hesitant to buy individual stocks, look for ones that have a solid track record of paying out generous dividends to their investors. If you’re not sure which ones are the best, start with the dividend aristocrats, which are stocks that have increased their dividend payouts for 25 consecutive years or more. Ronald Read's investments included AT&T, Bank of America, CVS, Deere, GE and General Motors, many of which he'd held for decades. Though they had no idea of his investments, friends did remember that he read The Wall Street Journal every day.
Aside from zeroing in on investments that are likely to have better returns, you also need to be mindful of their cost. Exchange-traded funds (ETFs) are a great low-cost alternative to actively managed mutual funds, which can eat up your earnings over time.
The Bottom Line
Retiring as a millionaire when you make minimum wage isn’t impossible, but you do have your work cut out for you. Getting started sooner rather than later, researching your investment choices thoroughly, and putting free or found money to good use whenever possible can put you firmly on the path to growing your net worth. (For more, see Investing 101: A Tutorial for Beginning Investors.)