5 Strategies to Save $1 Million
Sandra Block, Senior Associate Editor, Kiplinger's Personal Finance
Your odds of becoming a millionaire aren't what they used to be--they're better. A record number of U.S. households have reached that enviable goal: At the end of 2016, 10.8 million households had a net worth of $1 million or more, not including their primary residence, reports the Spectrem Group. In fact, there were 1.6 million more millionaires in the U.S. in 2016 than there were in 2007, just before the stock market crash. What the market took away, the current bull market has restored--and then some.
But stocks aren't solely responsible for household wealth. In a survey of households with investment portfolios worth $3 million or more, U.S. Trust asked people how they had accumulated their wealth. More than half of those responding (52%) cited earned income from a job or business, 32% cited investments and 10% credited an inheritance. So it appears that the vast majority of the group are self-made millionaires who follow a straightforward formula of working hard and using their income productively. We outline five routes to success.
Live like a million bucks
Let's start with the basics. One of the biggest barriers to reaching the $1 million milestone isn't a stock market meltdown or even a brief period of unemployment. It's something financial planners call "lifestyle creep"--buying a bigger house or nicer car every time you get a raise or bonus.
Loads of studies suggest that buying more stuff won't make you happier. But even if you're convinced that a luxury car will bring you joy, the money you spend to buy and maintain your new vehicle won't be available to compound and grow. Quite the opposite: Cars begin to depreciate the minute you drive them off the lot. And although real estate can be a good investment (see below), buying a bigger house means you'll need to spend more on utilities, furniture and landscaping, leaving you with less money to save and invest.
One of the most effective ways to rein in spending is to dedicate a specific percentage of your paycheck to savings every month. Leon LaBrecque, a certified financial planner in Troy, Mich., recommends saving 18% of your gross paycheck. That's a big ask for someone starting out, so he suggests beginning at 4% and increasing your savings rate by one or two percentage points a year until you hit 18%. Starting early is key: The sooner you start saving, the less you'll have to put aside each month.
Automate your saving. You can't spend money that isn't in your take-home pay, so take advantage of your employer's 401(k) or similar retirement plan to put your savings on autopilot. Contributions to a 401(k) are pretax, and money inside the account grows tax-deferred until you take withdrawals, which boosts your annual return. Plus, if your employer matches a percentage of contributions--and most large companies do--you'll have an even better shot at reaching $1 million.
Most 401(k) plans allow you to borrow, but if you want to reach the $1 million mark, you should reserve this option for genuine emergencies (remodeling your kitchen doesn't count). Money taken out of a 401(k) isn't growing, which means you'll miss out on any gains you would have captured if your money had been invested in the stock market or other assets. In addition, some plans won't let you contribute to your account until the loan is paid off, which puts you further behind. And if you leave your job before the loan is repaid, you're usually required to pay off the balance within 30 to 60 days. If you can't come up with the money, the loan will be treated as a distribution. You'll have to pay taxes on the entire amount, plus a 10% early-withdrawal penalty if you're younger than 55--a major detour on your road to becoming a millionaire.
Invest in yourself
As the hearing child of deaf parents, Jessica Moseley didn't consider using her skills as a sign language interpreter to make money. "I just thought of it as a way of life," says Moseley, 32.
All that changed when Moseley's mother, Myrna Aiello, expressed a desire to sell her business, a computer sales and service company based in Wheaton, Md. Moseley, who has a background in human resources management, had no interest in selling computers, but she saw potential in a small slice of the business that sold technology and interpreting services for deaf and blind people. In 2008, she bought out her mother's majority-ownership stake in the company and jettisoned the computer store so that she could focus on assistive technology and interpreting services.
It was a smart move. When Moseley took over the company, it had three employees and annual revenues of about $800,000; by 2015, it had 62 employees and more than $6 million in annual revenues. That year, Moseley restructured the company into two separate entities: TCS Interpreting, which provides on-site and remote sign language interpreters, and TCS Associates, which provides communication and technology consulting services for the blind. Moseley's husband, Bryan, runs TCS Associates, which has 12 full-time employees.
Keys to success. Starting a business can make you a millionaire, but the risks are high. About half of new businesses fail within the first five years. Having a well-thought-out business plan is important, along with identifying a product or service that's in demand.
That's been a critical factor in Moseley's success. When she launched her business, only four companies were offering deaf interpreters in the Washington, D.C., area, which provided a lot of opportunities for growth. Her company has contracts to provide legal interpreters in courtroom and law-enforcement proceedings for state and local government agencies. It also provides video remote interpreting services to more than 600 Social Security Administration offices.
Developing a diverse group of customers is another mark of a successful business, especially if your goal is to scale up by licensing your product or service, selling franchises, or being bought out by a bigger company. (You can get free advice from 10,000 small-business volunteers through Score.org, a nonprofit organization supported by the Small Business Administration.)
One of Moseley's challenges is that in recent years, the number of companies offering deaf interpreters in the Washington, D.C., area has increased to about 30. To remain competitive, she has had to lower prices, which has squeezed the company's profit margins from more than 18% to about 8%. Finding qualified interpreters is another challenge. Demand for certified deaf interpreters--individuals who themselves are deaf or hard of hearing, fluent in American Sign Language, and trained to recognize dialects, gestures and other ways that deaf individuals communicate--far exceeds supply, Moseley says.
Her near-term goal is to slow her company's breakneck growth and focus on finding clients who are willing to pay for high-quality service. "We want to be in a place where we can select the clients we want, not where we need to take as much business as we can," she says.
Meanwhile, the business has allowed her family to live comfortably. She and her husband have three children--Brayden, 6, Cooper, 3, and Riley, 19 months, a deaf child from India whom they adopted in May--and they're planning to build a new home close to the Maryland School for the Deaf in Frederick, Md. "The deaf community is very much a part of our lives," says Moseley.
Channel Warren Buffett
Asked about his investing success, Warren Buffett attributed it to "living in America, lucky genes and compound interest." That may sound glib, but it highlights two great ways you can build wealth (Buffett's genes aside): Buy shares of leading U.S. companies and keep plowing your money into the stock market, where it will grow substantially over time.
Buying stocks might seem foolhardy now, with the U.S. market near historic highs. Stocks don't look cheap, and we're overdue for a correction (a drop of 10% to 20%), triggered by a political crisis or other event.
But trying to time your entry could leave you on the sidelines during the market's best days (which account for big chunks of long-term gains). Even if stocks falter in the near term, they are likely to push higher over the long haul. As Buffett suggests, the U.S. remains one of the most attractive places to invest, with an entrepreneurial culture, solid rule of law, innovative technologies and many of the world's leading companies. These bedrocks of the economy have helped fuel the stock market's 10% annualized return since 1926. "As long as capitalism exists, the stock market will go up long term," says Gene Todd, head of the money-management division at First Bank, a financial-services firm based in St. Louis.
Granted, the path to $1 million gets easier if you have plenty of time and a pile of money to invest. With $50,000 in the kitty, it would take more than 31 years to hit the mark at a 10% annual return. But by investing steadily, through market ups and downs, you can accelerate the timetable. Adding $1,000 a month to the pot would push you past $1 million in 20 years. Saving $1,500 a month would get you there in a little over 17 years.
What to buy. These figures assume you plow every penny of dividend income and capital gains back into the market, and they don't factor in taxes or investment fees, both of which would trim your returns. One way to deal with those issues is to buy an exchange-traded fund that mirrors the broad market. One such fund, iShares Core S&P Total U.S. Stock Market ETF (symbol ITOT, $55), charges just 0.03% in annual fees, putting 99.97% of the market's returns in your pocket. (Prices and returns are as of June 30.) And because the fund distributes minimal capital gains, it's tax-efficient, too (though you may owe taxes on dividends if you hold the ETF outside of a retirement account).
You can try to beat the market with other ETFs, actively managed mutual funds or individual stocks. Todd, for instance, thinks banks will benefit from lower corporate tax rates and a rollback of regulations. Financial Select Sector SPDR Fund (XLF, $25), a member of the Kiplinger ETF 20, holds a bundle of them. (For the full list and other market-beating ideas, see 5 Super ETFs.)
Among mutual funds, one of our favorites is Fidelity New Millennium (FMILX). Emphasizing shares of large, growing companies, it has returned an annualized 10.8% over the past 20 years, beating Standard & Poor's 500-stock index. Vanguard Health Care (VGHCX), which focuses on medical stocks, has fared even better, gaining 13.1% annualized.
Individual stocks pose more risks, of course, but they can be well worth it. Buffett's holding company, Berkshire Hathaway (BRK-B, $169), has been a steady winner, edging the S&P 500 over the past 15 years with an annualized return of 9.2%. Berkshire holds a mix of stocks and businesses that it owns outright, including a railroad, insurance companies and an aircraft-parts firm. Buffett, 87, will eventually depart. But the company he built should continue to thrive, riding the strength of the U.S. economy. --Daren Fonda
Dig into real estate
When Jonathan Harb landed a major contract for his computer graphics business, Whiskytree, the extra cash motivated him to invest in residential property. His timing was spot-on. "We were in the aftermath of what happened in 2008, and market conditions were fantastic," says Harb, 43, who lives in San Rafael, Calif. He settled on two three-bedroom single-family residences in Santa Rosa, a more affordable city in the Bay Area, and put 25% down on each of the $300,000 homes at the end of 2010 and beginning of 2011. More than six years later, they are worth about $525,000 each.
Harb, whose company creates graphics for movies such as Rogue One, Thor and part of the Hunger Games series, has already passed the million-dollar mark in home values (on top of his rental units, his current house in San Rafael is valued at about $1 million). But he continues to rake in cash by renting out both homes, typically to families who stay for two to four years. To set attractive prices when the leases turn over, he'll survey at least a dozen similar properties to gauge the cost per square foot as well as the monthly rent. He then prices his units just below market rate. Currently, the rent is $1,925 per month for the unit with two bathrooms and $2,450 per month for the unit with three baths. The rents more than cover his mortgage payments.
How to get started. Though vacation-home sales fell in 2016, sales of investment properties rose 4.5% over the previous year, according to an annual second-home survey by the National Association of Realtors. If you're new to homeownership but want to dip your toe into investing, you could "buy your second home first," says Justin Gramm, an exclusive buyer's agent in San Diego. That means choosing an attractive neighborhood and a home comfortably within your budget that you don't intend to stay in forever. Hang on to the home as a rental property once you buy a new place; you'll be an expert on the neighborhood.
More-experienced buyers with enough equity in their homes can take out a home-equity line of credit and borrow from it to buy a property. The downside: Your own home is on the line as collateral. If you choose this route, "do your homework," says Cotty Lowry, a real estate agent in Minneapolis. That means studying the cost of similar rentals in the area you're targeting and the strength of the rental market so you can anticipate your monthly income. Be sure you have the funds to absorb extra expenses, whether that means covering your tenants' utilities, repainting the walls or dealing with vacancies. Speak with a loan officer to calculate your mortgage payments and closing costs.
Harb also advises those who are shopping around to develop a "network of resources," including a real estate agent and mortgage broker, whom you could call in a flash when you find a property you want--especially in competitive markets. The effort pays off. "Aside from opening my own business, the best investments I've ever made have been real estate," he says. In Silicon Valley, people associate wealth with careers at companies such as Google or Facebook, or speculative tech stocks. "But to me that's all noise," says Harb. "Buy some land." --Miriam Cross
Maximize a windfall
The odds that you'll win the Powerball jackpot are about one in 292 million, and stories about people receiving huge inheritances from eccentric relatives are usually the stuff of fiction. But there's a good chance you'll receive a modest windfall at some point in your life, and with proper planning, you can transform that bequest into a million-dollar nest egg.
Two-thirds of baby boomers will receive an inheritance, according to the Center for Retirement Research at Boston College. The median amount is $64,000; the average inheritance (which reflects bequests from wealthier parents) is $292,000. Other sources of windfalls include insurance payouts, stock options, the sale of a business and, occasionally, lottery winnings.
Managing a windfall is a problem we'd all love to have, but it can be stressful. Family members and dubious friends will no doubt have plenty of suggestions for how to invest your money. You may be tempted to splurge on a big-ticket item you've never been able to afford. That's why the most important first step you can take is to "hit the pause button," says Mark Beaver, a certified financial planner in Dublin, Ohio. Inherited IRAs have rules of their own, but for other kinds of windfalls it makes sense to stash the money in a safe place, such as a bank account or money market fund. You won't earn much interest, but you'll give yourself time to assemble a financial team and come up with a long-term plan. If you need help resisting the urge to splurge, plug "celebrities and bankruptcy" (or "pro athletes and bankruptcy") into a search engine for some cautionary tales of how quickly millions of dollars can disappear.
Set your priorities. Your financial team should include a certified financial planner, a certified public accountant or enrolled agent, an attorney and, depending on the circumstances, an insurance professional. Work with your team to create a priority list for your money, says Ashley Bleckner, a CFP in Newport Beach, Calif. If you have credit card balances or other high-cost debts, those should top the list because you'll get an immediate return of up to 15% or more by paying them off. Next, consider maxing out your retirement savings accounts, if you aren't doing it already. James Shagawat, a CFP in Clifton, N.J., asks clients to write down immediate, one-year and five-year goals. "This may be your only windfall, so we've got to make it last a lifetime," says Shagawat.
With the bull market approaching its ninth year, investing in the stock market may be unnerving. But as we noted above, stocks (and stock mutual funds) have historically recorded the highest rate of long-term growth. And you don't need to shoot out the lights: A $292,000 investment that earns an 8% average annual return would be worth more than $1.4 million in 20 years.
If the idea of investing your entire windfall has you reaching for the nearest antacid, especially with the market at its current lofty levels, consider dollar-cost averaging. With this strategy, you invest a given amount on a regular schedule. Your fixed amount of dollars will buy more shares when prices are low and fewer when prices are high. And if the market turns upside down, you'll have some money on the sidelines, which you can use to buy stocks at a discount.