How to Save $1 Million Without Thinking About It


It’s no secret that Americans need to save more. The issue — at least in part — is that saving requires sacrificing some of today’s wants in favor of tomorrow’s needs.

A recent analysis by NerdWallet shows an alternative approach: saving future income. According to the research, a 25-year-old earning $45,000 could accumulate nearly $1 million by investing modest raises and bonuses over the course of her career.

That’s either a retirement nest egg or a very healthy start to one, depending on your lifestyle.

Avoid lifestyle creep

When you start making more money, you’re likely to start spending more, using the extra income to eat out twice a week instead of once, for example, or to trade up to a new car.

After a while, it’s hard to remember a time when you drove a clunker or cooked for yourself on a Saturday night. As each raise continues to build on the next, you become accustomed to an increasingly higher standard of living.

In a 2015 SunTrust survey of households earning $75,000 or more, close to half reported lifestyle spending as the culprit of their savings shortfalls.

“No one ever has enough,” says Daniel Sheehan, a financial planner in Fresno, Calif. “When people get a raise or bonus, they look at that as an opportunity to do whatever they weren’t able to do before.”

Split the difference

Inflation — tempered as it has been — is a very real thing, as is the need to treat yourself. But a raise is also the easiest way to hit savings goals. The NerdWallet analysis struck a compromise, using just half of every raise but all of each annual bonus. The $1 million outcome is based on 3% annual raises, 5% annual bonuses and a 7.5% investment return.

Someone who doesn’t earn bonuses but still saves half of each year’s raise would still accumulate over $223,000 by age 65; undeniably a worthwhile boost to any retirement fund.

The analysis found that college savings goals can be achieved by parents in much the same way: A 35-year-old who earns $55,000 and saves half of his raises and all of his bonuses over 18 years would end up with $147,337, even accounting for a more risk-averse return of 6.5%.

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SOURCE: Arielle O’Shea