Do You Want To Be a Millionaire?
By: Josh Scandlen
The music is suspenseful, the lighting is dramatic, and the audience is eager to see if you are going to become the next million-dollar winner. But, before you give your final answer, be aware that you don’t have to be a contestant on a television game show in order to have the chance to become a millionaire. With your retirement plan and time, you may be able to retire with a substantial nest egg. How? Stay tuned.
The Hot Seat
Gloria, Theo and Alex are employees of the same company. All contribute to their company’s retirement plan, and all would like to be millionaires. Gloria is 25 and became eligible this year to participate in the plan. Since she just started saving, Gloria currently has only $1,500 in her account. Theo is 30 and already has accumulated $10,000 in his retirement plan account. After participating for many years, at age 35, Alex has saved $25,000 toward retirement.
Which employee has the potential to accumulate $1 million by the time he or she retires?
A. Gloria
B. Theo
C. Alex
D. All of the above
Your Lifelines
Before you answer, consider your three retirement plan lifelines: tax-deferred accumulation, time and flexibility.
Tax-deferred accumulation. You pay no current federal income taxes on your retirement plan contributions. An added bonus is that the income earned in your plan isn’t immediately taxed either. While taxes will be due once you retire and start withdrawing the money (or if you receive an earlier distribution), in the meantime, your account could benefit significantly from tax-deferred compounding.
Time. The longer you save, the more money you are likely to have in your plan account when you retire due to the power of compounding (earning income not just on your original investment, but on your accrued earnings as well). Time is literally on your side when you participate in your company’s retirement plan.
Flexibility. Most retirement plans allow you to decide how much to contribute (within certain limits) and which investments best suit your needs and goals. And you can periodically increase your contribution or adjust your investment mix if your needs change.
Your Final Answer
If your answer to the earlier question was “D - All of the above”, congratulations! Gloria, Theo and Alex all have the potential to accumulate $1 million before they retire. Suppose they each put their money in a plan investment that earns an 8.5% average annual total return. By performing a few calculations, they can determine the amount they will need to contribute to reach their goals based on the number of years before retirement and the amount they have already saved in their accounts.
Gloria calculates that, if she saves $3,250 a year, she could accumulate $1 million by the time she retires in 40 years. Gloria is able to make a smaller annual contribution than Theo or Alex, even though they currently have more saved in their accounts, because she has more time left before she retires. With 35 years remaining until retirement, Theo decides to save $4,288 a year in an effort to achieve his $1 million goal. And, if Alex saves $5,724 each year for the next 30 years, he, too, could be a millionaire.
A Million Dollar Plan
| |
Gloria |
Theo |
Alex |
| Number of Years Before Retirement |
40 |
35 |
30 |
| Current Account Total |
$1,500 |
$10,000 |
$25,000 |
| Average Annual Total Return |
8.5% |
8.5% |
8.5% |
Annual Contribution
To Reach $1 Million |
$3,250 |
$4,288 |
$5,724 |
This chart is for illustrative purposes only. It is assumes a hypothetical 8.5% average annual total return and is not representative of any particular investment vehicle. Your current balance, investment returns and contributions will be different. Source: NPI
You Can Be a Winner, Too
Even though you might not have 30 or more years left before retirement and will have to contend with fluctuating returns, you still have the chance to get in the game. By saving regularly in your employer’s plan, you could be a winner by achieving a financially secure retirement.
Since your retirement savings could become your largest investment, it is a good idea to discuss your retirement plan with a qualified financial professional who can advise you based on your entire financial picture.
Josh Scandlen is a Financial Advisor with Legg Mason Wood Walker, Inc., a diversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.
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