How to all but clinch a millionaire retirement

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Becoming a millionaire may seem like a fantasy when you’re working hard to cover the bills. But the good news is you don’t need a huge paycheck or a winning lottery ticket to amass a seven-figure nest egg by the time you reach retirement age.

In fact, by following just four simple steps, you should be able to save at least $1 million to help support you in your later years. Here’s what those steps are. 

1. Start investing early

It’s much easier to save $1 million if compound growth helps make it happen. When you begin investing, the money you’ve contributed to your account starts to produce returns. Those returns can be reinvested. When that happens, your account balance grows without any further intervention from you.

The sooner you begin investing, the more your returns can multiply over time and grow your balance. Say, for example, you invest $100 and earn a 10% return. By the end of the year, you’d have made $10 and would have $110. The subsequent year, if you earned the same 10% return, you’d make an $11 profit instead of a $10 one because your returns would be earning money for you as well. 

Compound growth is powerful. If you begin investing at age 20 and benefit from 45 years of compounding, you could end up with a $1 million nest egg by contributing just $115.91 per month to your account (if you earned an average 10% annual return). But if you waited until age 40 and had just 25 years of growth, you would have to contribute $847.33 per month to amass $1 million. 

Obviously, you can’t go back in time and begin investing at 20 if you’re already past that age. But if you want $1 million saved, start working on that goal the minute you can. 

2. Calculate how much to invest each month

Breaking big goals down into small ones is the easiest way to accomplish them. So start from the premise that you want $1 million saved by a specific age, such as 65. Then break this big goal down by determining how much to invest each month to reach your target.

Investor.gov has a savings goal calculator that can help you calculate the requisite monthly contributions based on projected returns and the date you want your $1 million to be available. 

3. Automate retirement account contributions

If you want to be sure you reach your savings goal, you must be consistent with investing your target amount. The best way to do that is to make the process automatic so you don’t have to manually make the decision to invest each month.

If you arrange to have contributions taken directly from your paycheck or to transfer the required amount of money directly from your bank to your brokerage firm each day you get paid, this maximizes the chances that you’ll stick with your plan to become a millionaire retiree. You’ll be far less likely to skip a month of saving if it happens without your intervention. 

4. Build a diversified portfolio

Finally, you’ll want to make sure you’re invested in a good mix of different assets that limit your risk while still giving you the potential to earn reasonable returns. If you’re good at selecting stocks, you can build a diversified portfolio yourself by spreading your money around and buying shares of companies across many industries.

If you don’t know how to choose a good mix of varying investments, diversification is easier with exchange traded funds (ETFs). You can select an ETF that gives you exposure to 500 of the largest US companies across all different fields by buying an S&P 500 index fund. Or you can buy several ETFs, including one investing in small companies, another in large ones, a third in bond funds, a fourth in real estate, and a fifth in emerging markets. 

By following these four steps, you can make certain you’re investing enough and earning generous enough returns that becoming a millionaire retiree is easily within reach.

 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post How to all but clinch a millionaire retirement appeared first on The Motley Fool Australia.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.



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