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Guide to Building a Million Dollar Retirement Account

August 31, 2016

By Dan Rafter | Money Rates Columnist

Retirement saving guide to save a million dollars

You don't know exactly how much money you'll need to fund your retirement. But you do know that entering retirement with $1 million or more saved up sounds good.

But can you save $1 million? How difficult is it to build a retirement account with $1 million in it?

Actually, not as difficult as you might think. Financial professionals say it's all about time and discipline: If you start saving early and you keep at it, building a $1 million retirement account is far from an impossible task.

"Many investors make the mistake of thinking that they cannot achieve $1 million by the time that they retire," says Vic Patel, founder of Forex Training Group. "However, when you do the math, it is quite achievable for most people."

Here are five tips to help you reach that million-dollar goal:

1. Start saving early

Time is your biggest ally when trying to save a large sum of money for retirement. The faster you start saving, the better.

Patel gives this example: Say you start saving $500 a month in a retirement account such as a traditional individual retirement account (IRA) at the age of 30. If that IRA grows at an average annual rate of 10 percent, you'll have about $1.1 million saved up by the time you hit 60.

The sooner you start saving, the easier it will be to get to that $1 million mark. If you start saving at an even earlier age, say in your 20s, you can hit that $1 million mark by stocking away even less each month.

To get a good idea of how much you will nee to save each month, use a retirement savings calculator

Say you start saving about $400 a month at age 25. If you average an annual rate of return of just 7 percent on those dollars, you will have $1 million saved by the time you turn 65.

2. Use your 401(k) if you have access to one

Joshua Brein, a financial advisor with Brein Wealth Management in Bellevue, Washington, said if your employer offers a 401(k) program, you should invest in the maximum possible into it every pay period.

Many employers will provide a match, depositing an amount of money equal to a specified percentage of your contributions at the end of each year. This is like free money for your retirement, and can help your savings account grow at an even faster pace.

"Your 401(k) is there for a reason," Brein says. "It's a great opportunity. You can store a lot more money in there than you could with an IRA that you opened up on your own. The 401(k) is a great tool to turbo-charge your retirement savings to $1 million."

Investing in a 401(k) is relatively painless, too. Your employer will automatically deduct funds from your paycheck and place it in your account. This means that you won't have the opportunity to skip a deposit, as you might be tempted to do with a traditional or Roth IRA.

3. Curb unnecessary spending

Stashing money away is just one half of saving for retirement. The other half? Controlling your spending.

Put simply, the less money you spend each month, the more you'll have to save. This doesn't mean that you can't ever splurge on anything. But it also means that you maybe you don't need to buy the most expensive house, priciest car or latest electronics. Depending on how much you make each year, it also might mean taking smaller or less frequent vacations.

This might all seem like a big sacrifice now, but if you get in the habit of living below your means, you'll dramatically increase your odds of building that $1 million retirement portfolio. And if you have that sort of financial flexibility when you hit your retirement years, you'll be happy that didn't spend all that money on a cruise or brand-new sports car.

4. Minimize or eliminate debt

It's hard to save for retirement when you have thousands of dollars of credit card debt. That's why Howard Dvorkin, a certified public accountant and founder of the financial website Debt.com, recommends that you do whatever it takes to pay off your credit card debt.

Credit card debt comes with sky-high interest rates, often as high as 19 percent, 20 percent or more. It doesn't make sense to put money in a retirement account if you are also paying 20 percent interest on credit card debt of $7,000. If paying off that debt will take you a year and prevent you from socking away any money for retirement, it still makes financial sense to funnel your money toward eliminating that debt.

Once you eliminate this financial burden, you can invest the money that you were spending on credit card debt in a retirement savings account.

"Without spending a penny more than you are now, you're saving for retirement," Dvorkin says. "Then human psychology kicks in. Once you start saving and see your balance grow, you get more psyched to save even more."

Once you've paid off your debt, start using your credit cards wisely. Only charge items that you can pay off in full each month, and resolve to never carry a balance on your cards from month to month.

5. Grow your emergency fund

Brein says that building an emergency fund is a final key to saving $1 million. Your emergency fund should have enough money to cover at least three to six months' worth of daily living expenses. This way, if you lose your job or face some other financial challenge, you'll have a source of cash from which to draw. This reduces the odds that you'll have to run up your credit card debt to survive an unexpected financial crisis.

"Not having enough money saved for emergencies is a huge reason why most people into debt with credit cards," Brein says. "Debt will derail your money train to $1 million in retirement assets."

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