How to Save $1 Million Without Breaking a Sweat

[grmagne]

Here's a Yahoo article explaining how long it takes to save $1,000,000 at various rates of savings and a 7% rate of return. That's the retirement target if you're planning to retire on $40,000/year. Since this is a Yahoo Finance article, you can expect a fair bit of cynicism and whining in the user comments.

http://finance.yahoo.com/news/save-1-million-without-breaking-144927888.html

[oldtoyota]

I wish they included higher monthly contributions in their list. However, I can understand why they would not. They did not want their average reader to faint!

[grmagne]

I wish they included higher monthly contributions in their list. However, I can understand why they would not. They did not want their average reader to faint!

Rounded to the nearest year, here are the number of years required to reach $1,000,000 at more impressive levels of commitment. It’s noteworthy that the smaller contributions are more sensitive to interest rates when targeting a specific dollar amount (or euro amount). When you make large contributions you’re guaranteed to reach your target fairly quickly, and bad luck in the markets will only slow you down a bit. However when you’re investing small amounts over very large time horizons, you’re relying heavily on the magic of compound interest and the rates of return will have an enormous impact on how quickly you reach your target.

5% Rate of Return
$500/month   = 45 years
$1000/month = 33 years
$1500/month = 27 years
$2000/month = 23 years
$2500/month = 20 years
$3000/month = 18 years
$3500/month = 16 years
$4000/month = 14 years

7% Rate of Return
$500/month   = 37 years
$1000/month = 28 years
$1500/month = 23 years
$2000/month = 20 years
$2500/month = 18 years
$3000/month = 16 years
$3500/month = 14 years
$4000/month = 13 years

9% Rate of Return
$500/month   = 32 years
$1000/month = 25 years
$1500/month = 21 years
$2000/month = 18 years
$2500/month = 16 years
$3000/month = 14 years
$3500/month = 13 years
$4000/month = 12 years

[grmagne]

Also, this article just uses the simplest of formulas and didn’t factor cost of living or salary growth into the equation. It’s interesting as a guideline but wouldn’t be realistic for long-term scenarios. For example, an eighteen year-old investor in 1953 hoping to accumulate $50,000 by the year 2013 would have contributed $5/month and finally reached the target this year (at the age of 78). Unfortunately, $50,000 doesn’t go very far any more, which would have seemed counter-intuitive to an investor in 1953 just as it’s counter-intuitive to a teenager today that $1,000,000 won’t buy very much in 2073 (the Yahoo article above shows that $100/month will allow you to reach $1 million by 2073, but it won’t be worth as much as you’d expect).

The key is that if you’re targeting a specific amount for a projected retirement that’s decades away then you don’t want to get too complacent. For example, investing $2,000/month now will allow you to reach $1 million around the year 2033, but it might not be enough to retire on. But don’t worry, your salary will also grow tremendously before you retire and your contributions will grow accordingly.  So you’ll still meet your retirement goals, and do so with a much higher retirement stash than originally anticipated.

It’s probably best to use the targets in this article http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/, which shows that saving a percentage of your salary will give you a very solid estimate of when you can retire without having to imagine or worry about how much inflation will erode your money over the decades to come.