There are 21,951,202 millionaires in the United States, according to Credit Suisse. That's a huge number, which means that it can happen to anyone.
But how can you get there? Three Motley Fool contributors outline the steps necessary to help you join this elite crowd. They're not hard to follow, and with a little discipline and smart investing moves, you can become a millionaire, too.
Image source: Getty Images.
Save automatically in your 401(k)
Chuck Saletta: Your 401(k) can be a wonderful place to reach $1 million in retirement savings. Most importantly, once you sign up to start contributing and investing, the money you invest comes out of your paycheck automatically. Aside from reviewing your choices periodically to make sure your investments still make sense given where you are in life, your journey to a $1 million retirement can then pretty much run on autopilot.
If you're at least age 50, you can generally contribute up to $26,000 per year ($2,166.66 per month) to your 401(k). If you're under 50, your typical annual limit is $19,500 ($1,625 per month). The table below shows how many years it will take to reach a $1 million nest egg based on how much you contribute each month and what rate of return you earn along the way.
|
Monthly Investment |
10% Annual Return |
8% Annual Return |
6% Annual Return |
4% Annual Return |
|---|---|---|---|---|
|
$2,166.66 |
15.8 |
17.6 |
20.0 |
23.3 |
|
$1,625 |
18.2 |
20.4 |
23.5 |
27.9 |
|
$1,500 |
18.9 |
21.3 |
24.5 |
29.3 |
|
$1,000 |
22.4 |
25.5 |
29.9 |
36.7 |
|
$500 |
28.8 |
33.4 |
40.1 |
51.0 |
|
$300 |
33.7 |
39.4 |
48.0 |
62.5 |
|
$150 |
40.5 |
47.9 |
59.1 |
78.8 |
Table and calculations by author.
Depending on how long you have before you retire and what rate of return you earn along the way, it's possible to become a millionaire retiree based on your 401(k) balance alone. Indeed, if you're brand new in your career, you might even get there on $150 a month -- or around $5 a day. Add an employer match and a potential tax deduction to the mix, and your out-of-pocket contribution could be even less to get to that same $1 million retirement nest egg.
That's an amazingly powerful outcome that you may very well achieve just by making the one-time choice to start contributing -- and then just letting the contributions continue.
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A magic way to earn millions
Eric Volkman: So you want to end your working days as a millionaire, eh? Well, then, please allow me to introduce you to the wonderful world of compound interest.
Yes, the term "compound interest" sounds like the dullest of the dull finance-wonk jargon. Yet this boring phrase obscures a concept that's almost magical in its power and simplicity and can really bulk up an investment over time.
In the long run, this is far more powerful than simple interest, in which a particular interest rate is paid on a principal amount of an investment. Traditional bonds are a good example of simple interest.
But with compounding, the interest you earn also earns interest. Essentially, it is reinvested into your principal, and that total amount keeps earning the posted interest rate.
The difference between the two becomes increasingly dramatic over time. In this table compiled by fellow Motley Fool contributor Matthew Frankel, a $10,000 investment earning annual compound interest of 10% would grow to $67,275 after 20 years -- more than double the pile you'd have in an investment of the same amount that only clocks simple interest at a matching rate.
After 30 years, that difference would be even more stark, at a respective $174,494 and $40,000.
When evaluating investment vehicles with compounding interest, it's important not only to look at the interest rate on offer, but also the frequency of the compounding. The standard flavors of frequency are annual, semiannual (i.e., twice per year), and quarterly (four times per year). At the risk of stating the obvious, all things being equal, would-be millionaires are better off with more-frequent compounding.
There are several types of investments you can put your money into to get the compound interest ball rolling.
The good old bank savings account is one -- many of them compound interest daily, so it pays to shop around (if you go this route, though, do resist the temptation to draw from such an account -- remember, the object is to save). Good compounders can be found among money market accounts.
The most popular savings bonds issued by our government also compound. Happily, they're also considered among the safest investments in the world.
Dividend reinvestment programs (DRIPs) aren't technically compound interest vehicles, but since they -- yes! -- reinvest dividend payouts into the purchase of more stock, they act in a similar way.
Image source: Getty Images.
No panicking allowed
Barbara Eisner Bayer: On the path to becoming a millionaire, there are lots of things you can control: contributions to retirement plans, funneling money into an emergency fund, keeping a balanced portfolio, and choosing investments in line with your risk tolerance and goals. However, there are things you can't control -- like economic crises, rising and falling interest rates, and day-to-day news on the companies you own. But if you want to become a millionaire, you'll need to ignore all that.
I always thought that if I had a crystal ball, I'd go back to the 1990s and buy Apple, Microsoft, and Amazon and never sell a single share. Then I'd surely be sitting on a small fortune. Oh, wait...I DID own those three stocks back then, but guess what? I sold most of them during the tech meltdown in 2001. As a result, I have nothing to show for my early brilliance.
Luckily, though, I bought back in once the crisis subsided -- but this time, I didn't sell, even through the mortgage crisis and COVID-19 crash. Apple and Amazon are still shining stars in my portfolio with significant gains. And I have no plans to ever sell those shares. Lesson learned: Don't panic sell!
The other way to derail your path to becoming a millionaire is to try to time the market. An optimal investment strategy would be to sell a stock when it reaches its highest point, and then buy back in when it reaches a low. Only problem is...how will you know when that is? Even psychics can't predict when that will happen. If they could, they'd be so rich, their storefronts would be mansions, and they wouldn't need to sell their prognostication prowess.
Since you can't time the market, the best way to become a millionaire is to buy solid companies with strong fundamentals, great management, and a strong moat around them so they can stay ahead of their competition. And then hold, hold, hold -- even through bad news, as long as they are short-term problems.
Look, no company is going to avoid challenges throughout the years. But what's important for investors is to realize most of these challenges are just blips, and strong management can guide great companies through any temporary hazardous conditions.
Becoming a millionaire retiree is within your grasp. Just make sure to stay the course and not panic sell along the way, and you can become millionaire No. 21,951,203!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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