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Have you ever looked at your retirement account and wondered if you would eventually have enough? Or maybe you’re just starting out and the thought of saving enough seems overwhelming or out of reach.
No matter where you are in your life, if you have time on your side, you could potentially become a millionaire. It’s probably a lot simpler than you thought and can be accomplished using this one simple strategy.
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Investing your money is vital
Saving $1 million with monetary contributions alone in 30 years would be pretty hard, as you’d need to contribute approximately $33,000 each year. But when you invest your contributions they benefit from stock market appreciation and compound interest, decreasing that amount by a lot.
If you have $5,500 that you can invest each year for 30 years, you could grow your accounts to $1 million by investing in large-cap stocks.
You can get exposure to this type of investment by buying an ETF like SPDR S&P 500 ETF Trust. There may be some small differences in the return you receive from year to year but these types of investments should track their index closely, and over time that difference shouldn’t be too big.
Between 1926 and 2020, you would’ve gotten an average rate of return of 10.3% if you invested 100% in large-cap stocks.
If you wanted a more recent time frame for comparison, between 1990 and 2020, your rate of return would’ve been 10.24%. That average includes the three years of negative returns when the dot-com bubble burst between 2000 and 2002 as well as in 2008 when large-cap stocks lost 37% of their value due to the Great Recession.
Always consider your risk tolerances
There is a chance that investing in only large-cap stocks is too risky for you and a lower amount of stocks would help you stay invested better. But this smaller percentage would come with a decreased rate of return.
If you reduced your stock exposure to 60% stocks and 40% bonds, your average rate of return between 1926 and 2020 would’ve been 9.1%. If your accounts were invested this way, accumulating $1 million in 30 years would’ve taken annual contributions of $7,000 annually.
You could also discover that while you feel perfectly comfortable owning all stocks when you’re younger, you get a little more nervous as you age and get closer to using your accounts. If this is the case, you could contribute smaller dollar amounts in the beginning and have a riskier portfolio. And as your appetite for volatility decreases, you can accommodate for this change by increasing your contributions.
Past performance doesn’t guarantee future performance
There is no way of telling for sure how your investment accounts will grow over time. And there could be years when you can’t make your contributions or when you sell out of your investments and don’t realize the return you expected.
Reaching a goal like this can be done but it will require consistency, and when events like this happen, your probability of attaining $1 million will greatly depend on how quickly you course-correct. The sooner you catch these mishaps and get back on track the better your chances of becoming a millionaire in 30 years could be.
Reviewing your accounts annually is a great way of doing this. And if the average returns you’re receiving differ greatly from the rates of return you projected or if you don’t contribute quite as much as you planned, you have plenty of time for making adjustments like saving more in future years.
You can accumulate $1 million even if you don’t have anything saved today. But it’s also possible that living the type of life you want in retirement doesn’t require $1 million. Even if this is the case, this type of investment strategy can be implemented easily. And it can help you accumulate the amount of money you need over time by providing you with a plan, the structure, and the consistency that could make reaching your long-term goals much more likely.
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Diane Mtetwa owns shares of SPDR S&P 500. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
