Any marathoner will tell you: You don’t think about all 26 miles at once. That would be too overwhelming. Instead, picture the race in chunks: five miles, three miles, even one mile at a time. Similarly, professional baseball players don’t think about all 162 games—rather 10-game stretches, or three-game series. Manageable chunks.
This same philosophy can be useful when saving for your post-work life, especially when it’s still decades away. While the idea of saving $1 million may feel like a near-impossible feat, putting away just $150 or so per month in your 20s seems completely reasonable—and that still gets you to the million-dollar mark by retirement age, provided you’re disciplined, start early and hit your “splits,” as runners would say.
Here’s what it could look like:
Okay, deep breaths. I’m going to walk you through these targets, and explain why they’re more reachable than you might think—and why, if you’ve hit 30 and haven’t saved that much, it’s not too late.
But first, let me say that I’m a big believer in using round numbers for simplicity’s sake. So for now, let’s set aside inflation, fees, taxes and dividends. Yes, those things are important, but its more important that you just get started—and track your progress.
The first thing you’ll probably notice about this chart is that your money doubles every seven years. I’m basing that on an investing concept known as the rule of 72, which says that if you earn 7.2 percent interest annually your money doubles in 10 years. Roughly, the reverse is true, as well: If you earn 10 percent on your money, it doubles in 7.2 years.
For the milestones listed above to work, you’ll likely need growth from both interest returns (say, 7 percent) and additional cash saved (3 percent). Any percentage variation works—bigger investment returns, less cash added; more cash added, smaller returns—so long as you get to about 10 percent, your money will double every seven years or so.
You also likely noticed that the larger your starting point in each doubling cycle, the larger the growth. Under the scenario above, the balances really start to blow up—to $200,000, $400,000 and beyond—during your 40s and 50s. That means the most important consideration is starting the doubling clock. If you embarked on this particular milestone chart at 37 instead of 30, for example, you’d be missing $800,000 by retirement age.
Now, let’s talk through my assumptions, and how I got there. Again, it’s not that difficult to get from $50,000 to $100,000 in just seven years. You can do it by earning 7 percent in returns—a fair guideline for market returns—and contributing about $150 per month to your account.
Here’s a chart that shows your yearly growth. (Again, indulge the round numbers and the use of monthly compounding interest to simplify the math.)
Note that you always can cover for lower-return years by contributing larger amounts of cash. Say you only see 5.5 percent returns. You’ll still reach $100,000 seven years later by upping your monthly contribution to make up for the difference. (You can try different combinations here.) Even if you get started during a rough patch—such as 2003-2009, when S&P 500 index returns averaged just a few percent—the good times will balance the bad times. Because 2009-2015 went so well, the “meh” of 2003-2009 was wiped out. The S&P 500 index gained 6.6 percent annually from January 2003- December 2015. (And that’s without dividend reinvestments.)
Another thing to keep in mind about your contributions: As you get older, the amount of cash that must be added in order to keep up the doubling effect—the 3 percent—needs to grow substantially. But you’re likely making more money, so that’s not unrealistic. For example, between ages 37-44, you’ll grow your retirement balance from $100,000 to $200,000 by earning 7-percent returns, for example, and depositing at least $250 per month (based on 3 percent of your starting balance, and assuming you’re getting 7 percent returns). Then from ages 44-51, your balance will balloon from $200,000 to $400,000 with 7 percent returns and at least $500 in monthly deposits (3 percent of $200,000 divided by 12).
At some point, your deposit requirement may become too large to keep doubling—and you might run into tax-advantaged account limits, depending on what they’ll be in the next 20 or 30 years. But here’s a secret: A pile of money that big can grow pretty fast on its own. Even if you stop adding cash at age 51, when you have $400,000 in your account, you’d still end up with $1.06 million by the time you’re 65, assuming an average annual 7-percent return. Without adding a penny!
So yes, it’s entirely possible to start a humble retirement account, add $150 per month in your 20s and 30s and still be on target to retire a millionaire. You just have to hit your splits.
Not sure you can hit those splits? Fortunately, these are mere guidelines, and you can—and should—bend them to your will. Here’s a slightly less ambitious set of milestones:
That model has you amassing $50,000 by age 30, earning 7 percent interest per year, then never adding another cent to your retirement savings (doubling every 10 years). Sure, it takes another decade to cross the million-dollar threshold, but it’s very light on the monthly budget after you hit 30.
Afraid you won’t quite reach $50,000 by age 30? How about this simpler adaptation, which moves back the guide three years and uses the original math above.
And finally, here’s a set for the late starters, who don’t reach that first $50,000 until their late 30s. To make up for it, they can add $400 every month, starting at age 37. For simplicity’s sake, we’ll keep their monthly contributions consistent at $400. By doing so, they can actually hit $1 million in just 32 years. Here’s what that could look like, assuming average 7-percent annual returns.
It’s critical, and worth repeating, that these are rough guides meant to inspire you to start running the retirement marathon now by focusing only on the first couple miles of the race. And there are caveats galore to this model: For starters, it’s unlikely but it’s possible that 100 years of market history might change course and 7-percent returns may not happen again. Or you might make the mistake of picking high-fee investments that cut into your late-in-life pile of cash. The tax code might change, severely impacting your ability to grow money tax-free, as this model assumes. (This assumes you’re investing predominately through tax-advantaged accounts like Individual Retirement Accounts.) And the biggest of all: Who knows what $1 million will be worth decades down the road? Maybe a lot, maybe not.
But none of those facts detract from the undeniable power of time and compounding. A journey of a mile beings with the first step. A journey to $1 million begins with your first $100 investment.
May 5, 2016