Retirement: Saving First Million Is the Hardest

Some of us are old enough to remember when having a million bucks really made you feel like a million bucks. Unfortunately, no matter what your age today, chances are you’re going to need to accumulate at least a million dollars to maintain your standard of living in retirement. 

Clients of mine who have checked out a retirement estimator of have been shocked to learn they needed to accumulate several million dollars to reach their retirement goals. It’s true, the more you make the more you will need to set aside to replace that income in your golden years. Plus, the younger you are now, the more you’re going to need to sock away in the long run. But I do have some good news - the first million is the hardest and it can most definitely get easier from there. (For more, see: The Millionaire's Retirement Plan.)

How can this be? First off, if you’ve managed to squirrel away a cool million so far, you have probably developed some positive financial habits that will continue into the future. Then, as your net worth increases, most of your wealth building sweat labor will be replaced by compounding interest.

Financial Habits of Millionaires in the Making 

The Millionaire Next Door by Thomas Stanley is one of my favorite books on personal finance and I highly recommend you give it a read. Even though it was first published over 30 years ago, the essence of what it has to say is evergreen. According to the book, the average (non-inheriting, that is) millionaire is just like the average Joe but in contrast has been financially savvy for years and consequently been rewarded for his or her good fiscal deeds. The book’s major takeaway is that becoming millionaire (that was then, multi-millionaire is more now) is more about smart financial habits than just making a ton of money.

A few of these habits include things like paying yourself first, being smart with debt and letting compound interest work its magic. These factors often aren’t doing all the heavy lifting alone though. For example, a happy marriage can increase your odds of accumulating substantial wealth whereas divorce can destroy the financial foundation you have worked hard to build.

The fiscally fit also avoid many of the traps that can really keep them from achieving true financial independence, such as procrastinating on planning for the future (denial, anyone?) or falling prey to continuous lifestyle inflation. (For more, see: How Much to Save to Become a Millionaire.)

Building the Big Bucks With Compounding Interest

Let’s assume you are saving $100 per month* and over the long term earn 8% after fees and taxes. Hopefully you are saving way more than this and have some tax-deferred accounts, such as a 401(k) plan or perhaps a Roth IRA). At that rate it would take you about 635 months (about 53 years) to build your first million dollars. If you started at 18, that would put you in your 70s.

Now, you might guess it would take some similarly onerous amount of time to accumulate your second million but not so fast Trigger. Using the same amounts and parameters as above at $100 per month, thanks to compounding interest your second million would take only 103 months (about 8.5 years) to accrue. That’s 85% faster than the first million. 

The amount of time to add a million to your net worth shortens for each additional million. It is the magic of compounding interest, your money makes money, and that money makes money and pretty soon you’re the one sitting pretty. From $10 million to $11 million it would take just 14 months. This, my friends, is how the rich get richer and you can too.

Getting Going and Staying on It

Starting the process can be a bit discouraging at the beginning. Put another way, you save $100 per month for one year and have a total of $1,245. Your portfolio grew a whopping $45, enough for two movie tickets and a popcorn to split but not exactly a life changer. But fast forward to when your account has a $5 million balance. If you continue that easy $100 per month contribution for a year, all of a sudden your accounts grew around $415,000. I’m going to go out on a limb here and assume if you are saving just $100 per month your income isn’t anywhere near $400,000 per year. So how to get from where you are to where you want to be?

The best advice I can give you is to sharpen your smart financial habits and get started sooner rather than later. The more time you give yourself the easier it will be to get your financial house in order and keep it growing. Work with a fiduciary financial planner to set a roadmap towards your various financial goals and someday it’ll be your next door neighbor pointing you out, “See that one over there? Easily worth millions!”

Live for today, save for tomorrow. Until next time remember, your money matters. (For more from this author, see: Should My Financial Advisor Be a Fiduciary?)


*Calculations are compounded annually at a rate of 8%. Also, the earnings are compounded and reinvested and to not take into consideration any tax implications and their effect on the investment. They are no representative of past or future performance but are provided for illustrative purposes only.  The illustration is not indicative of any specific investment.  Actual investment results will vary.  This type of plan does not assure a profit or protect against loss in declining markets. The opinions voiced in this article are for general information only.