Many people aim to retire with $1 million or more in savings. And the reality is that meeting that goal may be more doable than you'd imagine.
Now I know what you're probably thinking: “Sure, I can retire a millionaire if I'm willing to sock away half my paycheck.” But the good news is that you don't have to part with a heaping pile of money on a monthly basis to reach millionaire status. In fact, it's possible to get there by saving $500 a month.
Start early and invest wisely
Let's get one thing out of the way — if you don't start saving for retirement until you're well into your 40s or 50s, then $500 a month won't cut it if you're hoping to end up with $1 million or more. Similarly, if you play it too safe in your IRA or 401(k) plan and invest mostly in bonds, you may not generate high enough returns in your account to grow your balance into the millions.
Rather, if you want to become a millionaire on $500 a month, you'll need to start funding your retirement savings from an early age, and also invest your savings aggressively. That means loading up on stocks, which have historically delivered much higher returns than bonds.
Now if you can't choose individual stocks, which is generally the case if you're saving in a 401(k), or you don't know how to hand-pick stocks, worry not. You can fall back on index funds instead.
When you buy index funds, you get to own a bucket of stocks with a single investment. In fact, S&P 500 index funds are a particularly good bet, because they give you exposure to the broad stock market without forcing you to do a lot of research. And because index funds charge very low fees, they won't eat too heavily into your returns.
Running the numbers
Let's say you start funding a retirement plan at age 25 and are aiming to retire at the age of 70. That gives you 45 years to make contributions, and at $500 a month, you're talking about putting a total of $270,000 into your IRA or 401(k).
Let's also assume you either go heavy on stocks or on S&P 500 index funds and as such, your investments generate an average annual 8% return. That's a bit below the stock market's average, and that return accounts for both stellar years and corrections/recessions.
Based on the timing of your contributions and our estimated return, your ending savings balance will be a little over $2.3 million. That also means you're looking at a gain of over $2 million in your retirement plan. And that's pretty sweet.
An easier road than you'd think
The longer you wait to start saving for retirement, the more money you'll need to part with on a monthly basis to become a millionaire. But if you save from a very early age and invest in savvy fashion, you may be surprised at how easy it is to close out your career with $1 million or more.
Of course, not everyone needs millions to retire comfortably, and so if you're already in your 40s or 50s and haven't started saving for your senior years yet, don't despair. At the same time, get moving. You still, at that point, have time to build wealth, so the key is to get started as soon as you can.
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