Who wants to be a millionaire? Sometimes making ends meet feels so overwhelming, and meeting life's expenses looks so daunting, that you might believe you will never become a millionaire. While this may be true for many, it is not true for everyone. And those who have a financial plan to save in a dedicated fashion, can reach this financial milestone earlier than most. These 5 proven methods can put millionaire status within your reach by age 50, even if you have a family.
Start early, and start with Roth. Yes, it's true that many college graduates find themselves burdened by education debt. But when you get that first professional job, you likely become eligible to contribute to a 401(k) plan. In most cases, you are not able to receive a free company match unless you put in your own money. So, here's a simple formula: at age 25, start contributing just $5,000 per year, receive a 5% match, receive an 8% average rate of return, and by age 50, you will have $439,456. You can make that large sum even more valuable by contributing to a Roth 401(k) because any funds coming out of it in retirement will be tax-free. You can even substitute a Roth IRA for a Roth 401(k).
Catch up in your mid 30's. Ok, you were just getting started in your 20's, and maybe you took a pass on investing. But now you are now getting serious. I want to again beat that drum for Roth contributions because it does not matter have much money you have saved, it's what you will have after-tax, and Roth distributions are 100% tax-free in retirement. At age 35, your annual contributions to savings in a Roth 401(k) and Roth IRA will need to increase to be $15,000 annually, but you'll still get to $454,864 by age 50.
Own a home. If you buy a $300,000 home in your mid 30's, and receive a 3% annual return on your principal investment, the value of that home will grow to $467,390, yet your mortgage balance will fall to $183,956. That means your total equity (the amount you own) will be $283,434. Housing equity is part of your net worth. Get a higher return and you will get even closer to millionaire status.
Contribute early to a college savings plan. Let's say you have a child at age 38. When that child becomes 18, college costs will potentially be incredibly high, and you will be 56 years old when they enter higher education. So, here's the plan: save $500 per month for 18 years (which can include contributions from family over the years), and you will have nearly $250,000 saved for education by freshman year. Much of those savings will already have accumulated by your age 50 and, once you have college paid for, you can hit the accelerator on retirement saving as you approach your late 50's. Plus, if your child get s scholarship, all those savings are yours (subject to a 10% penalty on the growth-only).
Find alternative ways to make investments. Most of this article assumes your income will remain relatively modest through age 50, which is not always the case. If you have extra funds available for investment, take a small portion and systematically invest in index funds or a brokerage account, contribute to an HSA (and receive a tax deduction on your contribution, in most cases), or consider diversifying into real estate investments. Net worth is the value of all of your investments, minus your mortgage and any other debt you may have, so every additional investment can help.
Becoming a millionaire by age 50 takes a lot of discipline, and a lot of savings. For many, it's a bridge too far. For some, getting there will take substantial sacrifices. $1 million is just a number, and what is most important is what you really have after-tax. That is why I love savings in Roth retirement accounts. The downside to fixating on this goal is that you may pass up opportunities to enjoy experiences along the way. Financial planning can help you find the right savings goal for you at any age, and getting a plan together increases the likelihood you will reach the goals you set.