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How to retire as a millionaire

U.S. News & World Report - Money logo U.S. News & World Report - Money 25-09-2016 Ryan Derousseau

Millennials aren't known for their pessimism, but that's not clear considering their views on retirement. 

According to a recent survey by Wells Fargo, 64 percent of working people between ages of 22 and 35 say they will never reach $1 million while saving for retirement. But, as Wells Fargo points out, someone that starts with a $32,000 a year salary could reach $1 million by saving 5 percent the first year, beginning at age 25, and increasing that to 13 percent over the next few years while the salary also shifts upward. Assuming an average market return of 7 percent, then $1 million is more than doable.

"It's just about math," says Travis Sollinger, director of financial planning at Fort Pitt Capital Group in Pittsburgh. "It's definitely achievable by just about anybody."

Yet, whether if it's because of the 2008 recession, the lack of income growth seen in the past few years or the growth of student loans, young people are skeptical about their ability to increase their savings to a level that will support them in retirement.

But should they worry so much? And what can they do to improve their chances of reaching seven figures by the time they hang up their work boots?

Click ahead for three tips to reach $1 million.

1. Be patient to reap benefit of compounding

    © Nick White/Getty Images      Mark Lund, an adviser and founder of Stonecreek Wealth Advisors in Draper, Utah, has a number of clients that are worried their money isn't growing fast enough. He says he has to warn them that it's "the back end of the savings years where that money grows."

Investors don't really see this when they're providing 10 percent of their income today. That's because the impact of compound interest hasn't had a chance to show dramatic returns.

Lund uses this scenario while explaining how impactful compounding can be. Imagine two brothers: The frugal brother starts saving the day they graduate college while the other spends most of those first paychecks. After 10 years, the frugal brother has saved $20,000 ($2,000 a year). The big-spender sees this, and says he wants to start saving. In unity with his brother, the frugal brother says he wants the other to catch up so he stops saving altogether.

By the end of 30 years, the frugal brother has put away just $20,000, while the big spender saved a total of $40,000 ($2,000 over 20 years). Yet, assuming the money is invested and earns an average market return, the frugal brother's savings still outpaces the other by more than $100,000. It's because the frugal brother's money has had more time to compound.

"Even if you're saving a little bit, [over the] long run it will compound," Lund says.

And the compounding has more impact in later years, when calculating 7 percent against $500,000 as opposed to 7 percent of $1,000 now. That's why even adding in $100 a month to a retirement account can have a huge impact on savings later in life.

2. Don't be afraid to invest

  © david franklin/Getty Images    Often, the biggest mistake that Sollinger sees from young investors is their unwillingness to put the majority of their savings into stocks. He often advises young clients to put nearly all of their retirement funds into stock funds.

"If you're in it for 20 years, there's nothing to be afraid of," he said.

It's also important to take a tactic of high stock exposure due to inflation. Since over 30 years the cost of money will rise, $1 million won't be enough in order to spend like a millionaire today. That's because the purchasing power of a $1 decreases every year by 3 percent, based on historical average. That means in 20 years, $1 million will be like having $550,000 today.

The one way to clear this hurdle is through investing, since the returns of a large-capitalization index fund that tracks the 500 largest U.S. companies has historically returned 7 percent, after inflation, on average. Having investments that outpace inflation protects your spending power in the future.

"Assume high inflation and hope for low inflation," Lund says. 

3. Pick the right time to retire to determine your savings level

  © Jupiterimages/Getty Images    One reason millennials may be pessimistic about their ability to retire with $1 million is because they hope to retire at a younger age. The average age chosen was 59, according to the Wells Fargo survey.

While that's only six years less than the typical age of 65, it adds a significant barrier to the amount of money one needs to save to ensure there's enough to last through retirement. That's because in the years where compounding really kicks in, someone that retires at 59 will tap the accounts for living expenses, reducing the impact.

Lund recently had this conversation with a client, who first thought he wanted to retire at age 60. Doing the calculations based on the amount of income the client wanted to live on in retirement, the two realized this person would need to save $4,000 a month in order to reach the goal. That wasn't possible.

After working through some adjustments, reducing the amount the person needed each month in retirement – since expenses often drop – and increasing the retirement age to 65, the client then only needed to save $1,000 a month, which was much more achievable.

"It's all about having the right expectations and time horizon," Lund says.

And with the right horizon, $1 million doesn't seem too far-fetched at all.

Copyright 2016 U.S. News & World Report

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