Can I retire as a millionaire earning minimum wage? - Blog
Let’s start by establishing this fact: ANYBODY can retire as a millionaire by age 65. However, you must make a commitment to start saving early in your career and stick with your plan over several decades. There has to be a mindset to build wealth for this.
Below are some tips to get you started.
How to retire as a millionaire from minimum wage
According to Eurostat, the minimum wage in Germany as of January 2021 is around €19,200 per year (€1,600 per month) year. These are the steps you need to take.
1. Start saving and investing at an early age
For example, if you start saving for retirement at an early age of 25 years and save about €500 per month and earn 6.5% annual investment returns, your investment will accumulate just over €1 million euros by age 65. If you start at 35, you will need to save over €11,500 per year to achieve €1 million by the time you get to 65 years of age and assuming the same investment returns.
That is still pretty good, but it means saving over twice as much. Time is the most important aspect of compounding. The earlier the start, the less you need to invest.
2. Take advantage of employer contributions
Most employers who offer a pension package will match a portion of your investment, so invest enough to get the full amount.
You can start saving a little less and still hit the €1million mark if you contribute the maximum amount your employers can match. The minimum your employer can match is 2% of qualified earnings.
However, some employers can match up to 15% of your monthly savings. In essence, you will be saving 30% of your monthly income or twice the recommended amount.
3. Vest in your retirement account
If you change jobs often, be careful that you get to keep your employer contribution. Check the fine details because some employers have vesting schedules that disallow departing employees from taking the match with them until they have been working for the company for a specific number of years.
Hot tip: Always factor in retirement savings when changing jobs.
4. Save money on taxes
Check that you are saving money on taxes via different products and tax breaks. Speak with your financial advisor to help you with these. It is important that saving money on taxes is legal, while tax evasion is not. There are perfectly legal ways to enjoy tax breaks, which governments are happy to dole out.
5. Be a super saver and investor
It will take a firm commitment to saving and investing to reach the €1million mark leading up to retirement. You will have to be very disciplined and plan your budget properly.
If you do not have 40 years to invest and you were saving €74 per week (represents 20% on €19,200 per year salary) then try to increase the saving to €148 per week. Approximately you could retire with €200,000 to €230,000 after 20 years and from €701,000 after 30 years. These are approximate figures.
You could almost hit that €1 million mark by doubling your savings. It might be hard to do when you start, but it will be worth it in the end.
One cannot realistically buy Starbucks coffee every day, have a cable subscription and other expenses and still have left over money for retirement whilst earning less than €9.35 an hour.
However, you should constantly try to negotiate your way to a higher salary and start to make your money work for you. If you are 50 years old and save €36,000 per year on 6.5% annual return, you could potentially achieve millionaire status by retirement.
6. Pay off your mortgage
This can seem like a big goal, but think of how much further your money could go without a mortgage hanging over your head and giving you a headache. Paying off your mortgage quicker will be worth it in the long term.
7. If you do not have 40 years to invest, work an extra few years
You do not have to retire at 65. Besides, life expectancy has increased considerably over the years. If you are 50 years old, adding 5 more years to your timeline could potentially boost your savings by €120,000 if you continue to contribute just €148 a week.
8. Plan your finances
You should be debt-free (not including your mortgage) before setting aside any money for investing. Plan your budget well and eliminate your debt in order to free up your wealth building tool, which is your income. Tackle high interest rate paying debt first because spending a lot on high interest virtually guarantees a person won’t have any money left over for retirement savings.
9. Have a long-term view and constantly increase your contributions
Your retirement fund is not a short-term investment. Be careful with it and do not touch it until you retire. Do not let a temporary downturn in the market scare you into making a poor decision that could hurt you in the long term.
You will not be stuck forever with a minimum wage. Whether it’s via increases in minimum wage or promotions over time, your wage will increase one way or another. Make sure you increase your contributions as your income grows. Choose where you invest wisely.
10. Talk with an Investing Professional
If you have any trouble saving or investing the require amount, you should speak to a financial advisor or a wealth manager. You do not need to have lots of money before you seek expertise.
Find an advisor with fiduciary responsibilities and is willing to explain your options in simple terms. Also choose an advisor that is reachable and has experience working with people in your unique situation.
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