Let’s get this out of the way: Lottery tickets, penny stocks, and multi-level marketing schemes are not reliable ways to amass a million-dollar retirement fund. Thankfully, there is one dependable strategy you can use if you have enough time on your side.
Read on to learn the three-step plan that can carry you to millionaire status by the time you retire.
1. Spend (a lot) less than you make
In the absence of incredibly good luck, you cannot amass seven-figure wealth without saving. And to save, you need to spend less than you make.
How much less really depends on how old you are and when you want to retire.
If you’re in your 20s and expect to retire in your 60s, you can probably get by if you save 10% of your salary for the next 40 years. But if your timeline is shorter, the savings percentage needs to be higher.
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For some perspective, proponents of the movement called Financial Independence, Retire Early (FIRE) recommend saving at least 50% of your income. That’s aggressive, and usually requires some serious lifestyle adjustments.
But people do it, and you can, too. It comes down to what you’re willing to give up today to ensure your financial security tomorrow.
2. Invest in the stock market
Your cash savings account isn’t going to make you a millionaire. The returns on cash are generally lower than the rate of inflation — which means your cash balances are losing value rather than gaining.
To build wealth, you must invest in something that appreciates much faster than inflation. The right stocks, mutual funds, and exchange-traded funds (ETFs) can fit that bill. They’re also accessible for retirement savers. If you don’t have a retirement account today, you can open an IRA online and be investing within a few days.
The long-term average annual growth of the stock market is about 7% after inflation. Notably, this growth doesn’t happen evenly. The market might be up 30% one year and down 20% the next. There are two straightforward ways to manage that volatility:
Hold some U.S. Treasury debt alongside your stocks. Treasury debt is low-risk and stable. Those traits help smooth out the overall volatility of your portfolio.
Plan for a long-term investment timeline. You’re more likely to achieve that 7% average by keeping your money invested for 10 years or more.
You can easily participate in market-level growth by investing in an S&P 500 (SNPINDEX:^GSPC) exchange traded fund (ETF). The S&P 500 is an index containing 500 of the country’s largest, most successful public companies. An ETF tracking the S&P 500 will own those 500 stocks.
Your returns from an S&P 500 ETF should be roughly equal to the index’s return less the fund’s expense ratio. And here’s a power tip: Pick an ETF with a super low expense ratio, and more of the investment returns should flow through to you.
Now, to the nitty gritty of becoming a millionaire.
The table below shows the monthly investments required to amass $1 million over 10 to 40 years. The numbers assume your investments are earning market-level growth of 7% annually and you are investing in a tax-deferred retirement account like a 401(k) or IRA.
Years Until Retirement
