How You Can Build a $1 Million Retirement Fund

A seven-figure IRA is doable if you save diligently. And if you roll over your 401(k) into one, you could end up with even more.

The Government Accountability Office (GAO) released a reportrecently showing that more than 630,000 IRAs had balances greater than $1 million—and 314 had balances of more than $25 million. I’ll leave the policy discussions to others. This column is for people who might be interested in joining the ranks of the IRA millionaires and are wondering: Can a regular Joe really save enough to end up with a $1 million IRA?

The answer is yes.

Granted, there are some important qualifiers to that answer. You’ve got to be willing to save diligently and invest sensibly over a long period of time. And you’ve got to have enough income to allow you to save while also living an acceptable lifestyle.

But building an IRA with a balance of $1 million is definitely doable, and many people may be able to accumulate much more. Let’s take a look at a few of the ways one might achieve this goal.

Invest the Max in Your IRA

Probably the toughest route is to try to reach $1 million by saving only within an IRA account. The reason is that the IRA contribution ceiling—currently $5,500 for people under 50, $6,500 for those 50 and older—restricts the amount you can sock away each year and thus can expand the amount of time it takes for your account balance to grow, assuming a realistic rate of return.

Still, if you invest $5,500 every year and earn, say, 7% annually, you would have a balance of just over $1 million in roughly 38 years, or at age 63 if you start at 25. You could have your $1 million in 35 years if you were able to earn 8% a year, but I think that rate of return would be pushing it, given today’s low interest rates and high stock valuations. If you were more cautious, you could figure on a more conservative 6% rate of return, in which case getting to seven-figure territory would take 42 years.

Actually, if you follow this path—contributing the IRA max each year—you’ll probably get to $1 million a bit more quickly. That’s because the IRA contribution limit rises in increments of $500 based on the inflation rate. In 2013, the IRA contribution limit rose to $5,500 from $5,000, where it had been since 2008. If, just for argument’s sake, we assume the IRA contribution limit rises by $500 every fifth year, then someone starting today and contributing the max would hit the $1 million mark in roughly 36 years.

Once you’re 50 or older, you can also throw in an extra $1,000 “catch-up” contribution each year (unlike the regular contribution limit, the max for catch-up contributions doesn’t rise with inflation). Interestingly enough, a $1,000 catch-up contribution won’t help get you to the $1 million mark more quickly. It takes about the same amount of time as without the extra $1,000. Why? Well, you don’t get to invest that extra $1,000 for quite a while. And by the time you reach 50 and start putting it in, its effect is rather small compared with the tens of thousands of dollars the investment return is adding to your IRA balance each year. Still, contributing an extra $1,000 a year at a 7% return leaves you with nearly an extra $27,000 in 15 years.

Roll Over Your 401(k)

The other way to go—and the more likely route for most people—is to do as much saving as possible in a 401(k) or similar workplace plan, and then roll that money into an IRA at or near retirement (or do several IRA rollovers during one’s career). There are two advantages to this approach: First, assuming you have the money to save, you can sock away a lot more in a 401(k) than an IRA. The limit this year is $17,500, plus an extra $5,500 in catch-up contributions, although individual 401(k) plans can set lower limits if they wish.

The second advantage is that most companies match a portion of your 401(k) contribution, so your employer is also helping you toward that seven-figure goal. Matching policies can vary from company to company, but a typical arrangement is 50 cents on the dollar up to 6% of pay for a maximum match of 3% of salary.

So let’s assume someone is 25, earns $40,000 a year, gets 2% annual raises and contributes 15% of pay. That would translate into an initial contribution of $6,000, a bit more than today’s IRA max, although that contribution would rise with salary. Assuming a 7% annual return, it would take roughly 34 years for that person to hit $1 million. Throw in a 3%-of-salary-match each year on top of the 15%, however, and the time to reach $1 million shrinks to 32 years.

If you’re able to do the $17,500 max each year, that reduces the time to get to $1 million to roughly 23 years or so, assuming a 7% annual return. And you could actually reach the $1 million mark even faster, as the contribution limit is pegged to inflation (and unlike the IRA’s, the 401(k) catch-up limit, which is $5,500 today, also rises with inflation).

As a practical matter, though, only a minority of people have the wherewithal to contribute to the $17,500 maximum, let alone also throw in the catch-up too. That said, if you’ve hit the limit for what you can contribute to your 401(k) plan—or you suddenly came into some cash that you want to sock away—you may be able to do an IRA in addition to what you’ve put into your 401(k). To see if you’re eligible to do both in a given year—and, if so, how much you can contribute—check out the IRA calculator listed in RDR’s Retirement Toolbox.

People can differ about what size investment returns you’re likely to earn over the course of a career. I think 6% to 7% is a reasonable assumption for someone who invests in a stocks-bonds mix that’s tilted primarily toward equities. But whatever assumption you make about how you divvy up your portfolio between stocks and bonds, you’ll likely end up with a higher return—and an eventual IRA balance—if you stick to low-cost index funds or ETFs.

Don’t Forget to Factor In Inflation and Taxes

Of course, in the examples I’ve given here, you can end up with $1 million of purchasing power in the future. Assuming we’ll have inflation in the years ahead, $1 million in the future will buy less than $1 million today. How much less? Well, if inflation cruises along at 2% a year, $1 million in 30 years would buy about 55% of what $1 million today would buy. Or, to put it another way, you would need about $1.8 million in 30 years to match the purchasing power of $1 million today.

I also haven’t differentiated here between traditional IRAs and 401(k)s and Roth IRAs and Roth 401(k)s. Obviously, if you have $1 million or more that can be pulled tax-free from a Roth IRA, you’ve got a lot more spending power than if you have $1 million that’s still taxable in a traditional IRA.

But it’s not as if the Roth offers a free lunch. You contribute aftertax dollars to a Roth IRA or Roth 401 (k). With a traditional IRA or 401(k) you get a tax break upfront in that your contribution is deducted from your taxable income. Generally, that means you’re better off doing a Roth if you expect to face a higher tax rate when you pull your money out than when you put it in; a traditional IRA or 401(k) makes more sense if you expect you’ll face a lower tax rate later on. It can be difficult to tell what your tax rate may be down the road, so it can make sense to have money in both types of accounts. Remember too that you can convert money from a traditional IRA to a Roth IRA.

But don’t get hung up on whether you’re better off in a traditional IRA or 401(k) or a Roth. The important thing is to save consistently, even if you have to do so in a taxable account. And if you do that for long enough and invest those savings sensibly, then whether you’re in an IRA or 401(k), traditional or Roth account, or a combination of these, you too can join the ranks of the IRA millionaires.

Walter Updegrave is the editor of He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at

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