Table of Contents
Game shows, newscasts and online media often question what a person would do with $1,000,000. Often times it is the goal of aspiring retirees, after a long career, to have saved and amassed a cool million so that they can live their golden years out in financial bliss. In other cases, folks are looking to pay off their mortgages or tackle their children’s ballooning college tuition. Whatever the case may be, the ability to actually save one million dollars is really quite achievable if approached methodically. We will use these steps to illustrate what it takes:
- Set a Monthly Savings Goal
- Save amount from step 1 each and every month
- Enjoy $1,000,000
Monthly Savings Goals
We’ll take a look at what a person needs to do if they are looking to conquer this savings goal at each decade of their careers. But it in order to get to $1,000,000 it will be necessary to save a certain amount each and every month. To keep things simple, we will use a target age to reach $1,000,000. This age will be 67. Using these parameters we will be able to see what amount of principal needs to be added each month to reach our goal. An average return of 9% will be used to model our combined investment appreciation and dividend returns. Keep in mind that we are not taking into account inflation and that investment returns can vary widely from year to year.
Age Begin Saving
Number of Years
Monthly Savings Requirement to have $1,000,000 at age 67
Chart of Varying Time Frames and Monthly Savings Goals
Key Takeaway: Start Early with Small Amounts
As you can tell from the chart above it pays quite handsomely to start saving young. In fact, waiting until you are 35 to start saving will require you to put down more than 400% of what someone who was 20 would have had to put down. Now, if you are in fact 35 (or older) don’t despair… it could be worse. The later in age you start saving the harder it gets to take advantage of compound interest. If you are 35 don’t wait until you are 40 to start saving. Once again the amount you would have to save almost doubles during that short 5 year period. In other words… if starting early wasn’t an option then start saving now!
A Note on the Return You Should Expect from Stocks
Alright, so this section is going to be loaded with controversial content. You will find retirement gurus that recommend using 12% (e.g. David Ramsey) and some that recommend using 6% to model investment gains. We decided to use the middle ground between these two extremes: 9%. There is no right answer. At the end of the day, no one knows what will happen with any type of investment and thus using a number that is somewhat conservative to what the overall market has returned over the long term is probably a solid approach.
Another word of caution: the value of $1,000,000 at any point inthe future will never have the same purchasing power as $1,000,000 today. If net inflation is higher over the term that you are saving you will find your spending power has gone down. Although unlikely, due to various market factors (and the Federal Reserve), if inflation goes below 0 then your spending power will likely go up. Just keep in the back of your mind that tying specific lifestyle choices to $1,000,000 is not wise if you aren’t expecting to cash in for several decades. Likely everything will be different… including how much food, housing, boats, golf clubs and hairspray cost.
What Type of an Account Should I Use
There are numerous accounts that can be used. For simplicity, you can choose any type of account that will let you invest funds in the stock market. This can be your 401(k), an Individual Retirement Account (IRA) or just a vanilla Brokerage account. For tax-advantaged accounts such as an IRA or a 401(k) you will want to make sure that you follow the rules: don’t exceed the contribution limits. For a taxable Brokerage account that you can find at pretty much any discount brokerage such as TD Ameritrade, Fidelity or even Robinhood the sky is the limit.
Pro Tip 1: Pay Yourself First (Automate)
One of the challenges with saving money is that often times we find ourselves placing priorities of today over those of tomorrow. We see that new phone, car or want to eat that desert right now and thus spend accordingly. In essence: we spend the money we have now because we see it in front of us.
But what if you didn’t see it? What if it wasn’t in your account? This is what people mean by ‘paying yourself first.’ Prior to your paycheck either hitting your bank account or entering into your budget, have an allotment or automated tool to take your monthly savings goal out and put it where it needs to be (e.g. a Brokerage Account). This is not only effective at ensuring that you at least attempt to save the money required to reach your goal but it is also a psychological trick that limits what you conceive as ‘spendable money.’ You will be less likely to cut into your savings goal if it isn’t in your checking account or budget.
Pro Tip 2: Don’t Treat Your Investment as an Emergency Fund
Another tip is to never withdraw the money from your brokerage account. Never. At least not until you have reached your goal. The first time you do it may lead to ‘lowering the bar,’ for future withdrawals. Instead make sure you have an Emergency Fund that is wholly separate from your investment accounts. The less you interact with your investment accounts the better. You should aim to have 6-8 months worth of living expenses in your Emergency Fund. This amount should keep you from drooling over the possibilities your investment account may open up.
Here are a few resources to help you on your path to becoming a millionaire.
Archimedes once said, “If you give me a lever and a place to stand, I can move the World.” In the context of saving $1,000,000 the quote can be translated to:
Give me a long enough time frame and a small monthly savings goal, I can become a millionaire.
The earlier you start saving, the less you will have to save each month to reach your goals. If your goal is to save $1,000,000 then the monthly amount can be quite low if you start saving in your early 20’s. If you wait a bit the amount will definitely go up but now is always better than later when it comes to taking advantage of compound interest. If you invest aggressively in the stock market for a long stretch of time you will find that life will become easier in terms of growing your nest egg.
Just remember that once you start saving do not stop. Pay yourself first and deposit your monthly savings goal using some automated means. Keep an emergency fund separate from your investments so you can keep your paws off what you have accrued. Finally, as always, talk to an investment professional or tax advisor for specific information about how to invest or what to do with your money. This article uses real math, but numbers aren’t people and your situation will likely need a human’s touch.