06 Dec When will I have $1 million?

Q. My 401(k) has $260,000 and my IRA has $180,000. I want a million dollars before I retire. How can I see how long that will take? I contribute the max to my 401(k) but I haven’t done the IRA every year.
— Planning ahead

A. Having $1 million dollars is considered to be a sweet spot in order to retire comfortably.

But it’s just a dollar figure. Whether that will be enough will depend on a lot of things, including your spending patterns.

We’re going to make a few assumptions to try to answer your question.

We’ll assume you are 50 years old and plan on retiring when you’re 66. We’ll also assume that your portfolio consists of a moderate allocation, approximately 60 percent in equities and 40 percent in fixed income, producing an annual rate of return of 7.5 percent.

You said you have a total of $440,000 in retirement savings, and you contribute the maximum to your 401(k). That would be $18,000 annually, and if you’re above 50 years of age, you can make another $6,000 catch-up contribution.

You may or may not be able to also contribute to an IRA due to various exclusions, so we assume you will only be contributing to your 401(k).

Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway, ran a few scenarios for you.

Importantly, he’s excluding employer matching contributions to your 401(k) because we don’t know those amounts.

If you max your contribution to 401(k) and do the catch-up contribution, which adds up to $24,000 a year, with a 7.5 percent rate of return, you’ll hit the $1 million mark in about 7.4 years, McCarthy said.

If you don’t do the catch-up and all else stays the same, it will take about 8.1 years to reach $1 million, he said.

“If you are younger with a longer time horizon or/and are more aggressive, a higher investment rate of return could be assumed,” he said. “As an example, a 40-year-old in an aggressive allocation of 75 percent equity and 25 percent fixed income could use a 9.5 percent rate of return over the 26 years until retirement at age 66.”

In that case, if you save $18,000 a year at a 9.5 percent rate of return, it will take about 6.7 years to hit $1 million, McCarthy said.

“Here you can see the impact of compounding and the rate of return – the same amount invested yearly but you reach your goal approximately 1.5 years sooner,” he said.

But on the other hand, if you are older or are risk averse, a more conservative investment rate of return will apply.

Let’s assume a 4.5 percent rate of return, which McCarthy said is standard for a 50-year-old conservative investor who plans to retire at 66.

If you do the full $24,000 a year contribution at that lower rate of return, it will take about 11 years to reach $1 million, he said. If you save $18,000 a year, it will take about 12 years.

“As you can see from these examples, the rate of return, time until retirement and the amount of contributions are very important factors that can delay or expedite the amount of years needed to reach your goal of $1 million,” he said.

Equally critical, but not illustrated, is avoiding any major declines in your portfolio value, especially as your draw closer to your retirement date, McCarthy said.

He recommends you work with a certified financial planner to develop a detailed saving and investing strategy for your specific situation to provide the road map to your goal.

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This post was first published in December 2017.