Here’s the salary you need to earn to retire in 20 years with $1 million—without saving more than 15% of your income

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By Emmie Martin – CNBC MakeIt

To have enough money in retirement, experts typically recommend building up at least $1 million in savings. But if you wait to start putting money away, the amount you need to save each month to reach seven figures skyrockets.

If you aren’t planning to sock away half of your paycheck, or more, each month, you need to bring in a sizable income. CNBC calculated the salary you’d need to earn to save $1 million in 20 years without putting away more than 15% of your income.

Keep in mind that these calculations assume you’re starting with nothing in savings and don’t take into account the many ups and downs you may experience over your lifetime, including pay raises, periods of unemployment or sudden financial windfalls or losses.

  • With a 4% rate of return, you’d need to earn $217,393 per year and save $2,717 per month to reach $1 million in 20 years.
  • With a 6% rate of return, you’d need to earn $172,283 per year and save $2,153 per month to reach $1 million in 20 years.
  • With an 8% rate of return, you’d need to earn $134,919 per year and save $1,686 per month to reach $1 million in 20 years.

As the numbers show, building up a $1 million retirement fund on such a short timeline requires a high salary. That’s why it’s smart to start saving as much as you can as early as you can. You’ll be able to take advantage of compound interest, in which any interest you earn then accrues interest on itself, which builds your savings faster.

If you do end up starting later in life, it would be wise to put away more than 15% of your income to make up for the lost time.

How much you really need to retire

It’s worth noting that although $1 million is oft-cited as the gold standard of retirement savings, it may not be enough going forward. In some cities, such as New York, Boston or San Francisco, $1 million would cover retirement expenses for less than 15 years, according to data from personal finance website SmartAsset.

Not only is the cost of living expected to continue to rise, but investment returns are predicted to fall short of the roughly 10% historical returns they’ve been in the past. The economists at investing giant Vanguard predict that, over the next 10 years, annual U.S. stock market returns will likely average 3% to 5%. Adjusting for inflation, the real rate of return comes in just under 3%.

Because you can’t predict, or control, factors such as taxes or health-care expenses, it’s smart to build up your savings as much as you can. Starting early can give you a major boost. If you start at 25, you have to save roughly $500 per month to hit $1 million by retirement (assuming a 6% annual rate of return). If you’re able to let your money grow for three or four decades, you’ll earn more in interest and need to contribute less of your own cash.

Where to put your retirement savings

If you plan to use an employer-sponsored 401(k) plan to save for the future, remember that these plans come with contribution limits: In 2019, you can invest up to $19,000 in your account, up from $18,500 in 2018.

Because aiming to save up $1 million in just 20 years requires putting away more than that limit each year, you’ll need to find additional ways to invest your money. Here are three steps to follow to get the most out of what you save.

1. Figure out which retirement savings account makes the most sense for you

First, determine which tax-advantaged retirement savings accounts are the best options for you, depending on your income and tax status, Nick Holeman, a certified financial planner and senior financial planner at Betterment, tells CNBC Make It. These can include a 401(k), Roth IRA, traditional IRA and/or a health savings account.

Traditional 401(k) plans, for example, offer tax savings upfront, while Roth-style accounts offer tax-free withdrawals in retirement. Here’s a breakdown of how different types of retirement plans work.

2. Max out your retirement accounts

Once you’ve determined the best account for you, contribute as much as you can to it. “Most people should start with their 401(k) if there’s a match,” Holeman says. But, “if your 401(k) has really high fees or really bad investment options, you might be better off starting with a traditional or Roth IRA and then going to your 401(k) after you’ve maxed that out.”

Once you’ve maxed that out, “waterfall your way down” through other tax-advantaged accounts, Holeman says. “Figure out how much you need to save, then rank the accounts from best to worst and fill up the buckets as you go until you’re unable to save anymore.”

Keep in mind the account limits. In addition to the $19,000 you can put in your 401(k), in 2019, you can contribute $6,000 total into your traditional and/or Roth IRA and $3,500 into an HSA, $7,000 for families. There are also income limitations on Roth IRAs that you need to consider as well.

3. Branch out to other investments

Once you hit the limits, you’ll want to consider more traditional brokerage accounts, like ETFs or mutual funds.

For retirement savings, Berkshire Hathaway CEO Warren Buffett recommends low-cost index funds. “Consistently buy an S&P 500 low-cost index fund,” he told CNBC’s On The Money in 2017. “I think it’s the thing that makes the most sense practically all of the time.”

Keep in mind that if you plan on retiring early, you’ll be hit with a penalty and taxes if you withdraw funds from your 401(k) or traditional IRA before age 59 1/2. (There’s no penalty on a Roth IRA, but you will face a tax bill.) So if early retirement is your goal, you’ll likely want to explore other investment options first.

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