How to Turn $50,000 Into $1 Million by the Time You Retire
There’s no denying that $1 million isn’t the startling level of wealth it once was. The US Census Bureau estimates that about one in ten people living in the US is worth a million dollars, if not more. Still, a $1 million nest egg would be a great source of comfort for most working-class Americans.
The thing is, a seven figure stash is actually not out of reach for most of us. The key is to use all the time you have and do smart things with your seed capital. In this case, “smart” just means getting into the market and leaving your investments alone for as long as possible. With a modest $50,000, you can easily get to $1 million in less than one lifetime.
Multiple paths to $1 million
Sounds impossible? It is not. I even show you the math in pictures. But one after anonther.
For the purposes of this exercise I will make three main assumptions. The first of these is that you invest $50,000 in the broad market using an index fund like that SPDR S&P 500 ETF Trust (SPY -1.55%)which is intended to reflect the performance of the S&P500 index (^GSPC -1.51%). Second, let’s say the S&P 500 continues to distribute — on average — aggregate returns of about 10% per year that you reinvest into the same fund. Finally, let’s say you build your nest egg in a tax-free account like an IRA or annuity.
Given these three factors, the chart below speaks for itself. What started with $50,000 ends after 32 years with just over $1 million. Most of that growth comes not from income from your original contributed capital, but from income from your cumulative growth. For perspective, your net earnings over the last year on this projection model are nearly $96,000.
And to be clear, this million-dollar portfolio was only founded on a one-time investment of $50,000.
There is clearly a “catch” – actually two of them. One is that you may not currently have $50,000 available to put into a retirement account. The other catch is that you may not have 32 years left by the time you retire.
But that’s okay. The underlying principles remain the same no matter how much or how little money you have or how little time you have to reach your projected retirement age. These principles are: Use the money you have (or can find) as quickly as possible and stay in the market as long as possible.
Here’s an alternate scenario that may apply to you better. Let’s say you don’t currently have a large cash stash, but you can scrape together an extra $3,000 every year for the next 32 years. Assuming you earn the average 10% profit that the S&P 500 produces and reinvest those profits back into the same fund, you’re sitting on about $660,000 worth of stash. Not bad.
Or maybe you took a different path and decided to spend several years in college or start a business that doesn’t pay much at first but pays well later in life. Let’s say you only have 25 years before you retire, but you can comfortably pay $10,000 into a retirement fund every year for each of those 25 years. In this scenario, you would end this timeframe with just over $1 million.
Again, notice how quickly your gains will accelerate at the end of your savings and investment years. This is when your new earnings really build on top of your old earnings. In this third scenario, investment gains reached a whopping $60,000 in the 25th and final year alone, assuming the market achieved its typical 10% annual return.
Just start
The point is, whether you’ve got a modest wad of cash right now, can just find a few extra bucks a year to put into retirement, or need to postpone investing now for bigger paychecks later, don’t think about it You for a minute that becoming a millionaire is too far away. Time is your greatest ally as an investor, so do what you can as soon as possible. Even a small amount is better than nothing now.