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The One-Year $1 Million Challenge

It's true what they say: Youth is wasted on the young.

I'm not going to get all sentimental about how responsibilities are nil and possibilities are endless. No, the real waste is the time young folks have to compound their money.

The one-year $1 million challenge
At a certain age, if you:

  • Max out your 401(k) contributions for one year,
  • Max out your IRA for that same year, and
  • Merely meet the market's historical 10% annual returns

... you'll wind up a millionaire by the time you hit retirement.

That age? Twenty-six. It takes $20,500 -- $15,500 in a 401(k) and $5,000 in an IRA -- 41 years of compounding at 10% to turn into $1 million, without ever having to contribute another dime. Of course, inflation between now and then means that $1 million won't buy nearly as much four decades in the future as it does today. Still, it's a remarkable feat of compounding.

In fact, that's how you win the $1 million one-year challenge: You make time your biggest ally in amassing phenomenal sums of wealth.

You see the absurdity here, right?
In order for a 26-year-old to save $20,500 in a single year, she'd either need to find a fabulously high-paying job or a rent-free room in her parents' basement. Either way, she'd probably be living on a strict diet of ramen noodles.

It's a stretch goal for people just starting out in life, to say the least.

But here's some good news for those of us who long ago celebrated a 26th birthday: The power of compounding doesn't care whether you invest it all at once, or only save a bit at a time.

It's most important to simply sock away as much as you can, as quickly as you can, and let it compound for as long as possible.

If you're past 26 ...
While time is the ally of the young investor, we more mature folks haven't been entirely left out to dry. In fact, even if you're around 50 and haven't yet saved a dime for your retirement, it's still possible for you to retire with $1 million at the reasonable age of 67.

This table shows how much more effort it takes to become a millionaire when you wait longer to start saving:

Starting
Age

First Year's Contribution Grows to ...

Consecutive Contribution Years to Reach $1 Million

26

$1,020,596

1

32

$576,100

2

36

$393,484

3

39

$295,630

4

41

$244,323

5

42

$222,111

6

44

$183,563

7

45

$166,876

8

47

$137,914

9

48

$125,376

10

49

$113,978

11

50

$133,943

12

51

$121,767

15

52

$110,697

DNF*

Assumes you max out your contributions every year -- including catch-ups for ages 50 and up. Does not include any employer contributions.
*DNF: Does not finish with $1 million or more by age 67.

The older you get, the clearer the picture becomes: You cannot retire a millionaire from one year's savings. You'll need to be disciplined and consistent about saving, taxes, and investing.

You can still get there
If you can save the cash and have the time to let compounding work, you can reach these returns. Every number in this article assumes you simply match the stock market's 10% historical annualized returns. There's no guarantee of that happening, of course. But if history is a worthy guide for the future, an easy way to match those returns is with an S&P 500-tracking index mutual fund.

The Vanguard 500 Index (VFINX), Fidelity Spartan 500 (FSMKX), or SPDRs (SPY) exchange-traded fund are three vehicles that have low costs and broad diversification. In any S&P 500 index fund, for instance, you'd get a small slice of these and 493 other large, generally very profitable companies, working together to make you a millionaire:

Company

Market Cap
(in Billions)

Trailing Earnings
(in Billions)

Percentage
of S&P 500 Index

Microsoft (Nasdaq: MSFT  )

$310.8

$14.88

2.22%

JPMorgan Chase (NYSE: JPM  )

$139.2

$16.30

1.16%

Coca-Cola (NYSE: KO  )

$144.8

$5.45

1.04%

Abbott Labs (NYSE: ABT  )

$93.5

$1.93

0.78%

Walt Disney (NYSE: DIS  )

$56.8

$4.67

0.47%

Caterpillar (NYSE: CAT  )

$40.9

$3.45

0.34%

FedEx (NYSE: FDX  )

$26.1

$2.00

0.22%

Use everything you've got
Of course, the toughest part of this plan is coming up with the $20,500 per year ($26,500 if you're 50 or older) it takes to max out both your 401(k) and an IRA. It's quite a sacrifice, but fortunately, you don't have to make it on your own. Depending on your specific circumstances and the plans you have available, you'll get some combination of:

  • Tax-deductible contributions,
  • Tax-deferred (or potentially tax-free) growth, and/or
  • Employer-matching funds

... to significantly soften the blow to your pocketbook.

Whatever help you may get, in the end, isn't having that $1 million -- or even larger -- nest egg worth the short-term sacrifice it takes to get there? At Motley Fool Rule Your Retirement, we certainly think it's a worthwhile goal. That's why we're dedicated to helping you find and use all the tools available to you to get you there as efficiently as possible. To see all the tools, tips, and resources we've assembled to enable you to retire successfully, take the next 30 days to check us out, free.

Fool contributor Chuck Saletta wishes the IRA and 401(k) limits were at their current height when he was in his 20s. At the time of publication, Chuck owned shares of Microsoft. Microsoft and Coca-Cola are Motley Fool Inside Value recommendations. Disney and FedEx are Stock Advisor picks. JPMorgan is an Income Investor selection. The Motley Fool owns shares of SPDRs and has a strict disclosure policy.


Read/Post Comments (8) | Recommend This Article (96)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2008, at 9:03 PM, WSWarrior wrote:

    start earlier - Start at 5 years old!!

  • Report this Comment On September 15, 2008, at 2:37 PM, sylverfire wrote:

    I have to agree with Boston Counseling in that I both love and hate these articles. I've known these facts for a few years, but haven't been able to do a whole lot about it consistently. And right now, I have no regular income, so even more unable to do anything.

    But that doesn't mean giving up. ;) As the article shows, there's still hope even if you start late.

  • Report this Comment On September 21, 2008, at 12:44 AM, metcash wrote:

    yes you can turn back the clock so to speak.

    if it makes you feel any better so be it.

    the average idiot takes out a 30 year mortgage and still does not pay down that interest. be smart and do the 15. a 35 year old taking out a 15 year mortgage will pay off the mortgage at the same time as a 20 year old. but how many 20 year olds do you know who bought a home?

  • Report this Comment On September 26, 2008, at 4:37 PM, GreenReaper wrote:

    I just turned 26, and I did this for the last three years (well, apart from the 10% return part), plus getting matching 401k contributions. You need a well-paying job, but people can still get such jobs.

    I don't feel like I've sacrificed anything significant. You learn to be frugal. I take a ride to work and I share a co-worker's house. I did without my own TV until recently, and even then I only paid $600 for it. I don't have a mobile contract.

    If I can keep this up, I hope to be able to retire when I'm 40. I might not do that, but it'd be nice to have the option.

    As a bonus, in my first year I got $1000 back from retirement savings contributions credit, because after the 401k deductions my AGI for that year (really, half-year) was less than $15,000. Total federal tax: $169. Talk about a government-supported retirement!

  • Report this Comment On November 06, 2008, at 5:55 PM, delrea wrote:

    Another way to do this would be to help out our children. The 20,500 equals to 65.70 a month if you start when the child is born. Nearly 80% of parents CAN afford this! It's a matter of commitment, right along with buying diapers and formula!

    Then, TEACH children about it is all about and how to take care of it. When the child starts working (usually age 16) have them start contributing a percentage of the 65.70 and continue to increase their percentage (depending on their income) until they reach age 26. At that time the above scenario would be accomplished and they can choose to continue to contribute (even 100 a month would be significant) for a long as they wish.

  • Report this Comment On November 19, 2008, at 2:05 AM, InvestorN0ob wrote:

    My girlfriend and I have set a goal for ourselves to religiously save up every month for a purchase of a home. I would be responsible for paying all the bills (credit cards, cell, gas, etc...) and she would be the one that deposits $1,000 off every paycheck into a savings account. We've been doing a great job and haven't missed one single deposit. I'm hoping to generate $80,000 in less than 4 years. I guess the only problem is... figuring out where to put it into that will give me an average of 8-10% return...anyone have suggestions? Thanks in advance.

    InvestorNoob

  • Report this Comment On November 19, 2008, at 1:51 PM, schleiff wrote:

    Ah well I like what I read as I am only 18 years old. Hopefully I can learn from the economy right now and continue my trends of not spending irresponsibly and start saving early. I have slightly tapped the stock market as I have much to learn but I have already started saving by stashing my money in high rate cds, assuring I wont spend it and gaining a decent return over the years.

  • Report this Comment On November 29, 2008, at 11:57 AM, techsavyone wrote:

    No argument with compounding and saving early. I'm now 47 and have been saving since I was 25. Unfortunately, over the past 11 years, the market has not done much for buy and hold investors. The S&P was at 825 back in fall of 1997. That is basically a 0% return over the past 11 years. In order for the market to return an average of 10% per year, we're going to need to see some pretty spectacular annual returns for the next 15-20 years.

    Question for Chuck: Do you still think that expecting 10% average annual return from the S&P is realistic?

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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