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Why You Need to Become a Millionaire

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Not so long ago, becoming a millionaire was the ultimate symbol of having reached the pinnacle of success. Now, though, most young investors pretty much see $1 million as the price of admission if you want to retire comfortably.

A survey from the Northwestern Mutual Foundation asked investors of various ages how much they believed they needed to save in order to retire. Among those ages 18 to 29, 85% said they'd need to save at least $1 million for retirement, with nearly half saying that $2 million was the minimum. Out of those who were 30 or older, 60% believed they'd need to become millionaires in order to afford to retire.

3 big threats
You might think that those numbers sound alarming. But bear in mind that young investors face several threats to their financial security.

Most obviously, inflation will likely take a significant bite out of the purchasing power of their retirement savings. By 2050 -- the year that a current 24-year-old will turn 65 -- even if you assume a relatively modest 3% inflation rate, it'll take more than $3.35 to buy what $1 would buy today. Put another way, even if young investors succeed in saving $1 million by then, it'll only go as far as $300,000 does currently. Granted, most people's income typically increases and is adjusted for inflation, but still, this should remain a concern.

Furthermore, if life expectancy continues to increase, then today's young investors need to plan for an even longer potential retirement. Whereas a more modest nest egg might give you 10 years of financial security, you could easily live 30 years or more past the day you quit your job. If you want to make sure you don't run out of money, you'll need a bigger nest egg to give yourself a safety cushion.

Finally, smart investors aren't counting on the safety nets that some current retirees enjoy. Pensions will likely be a thing of the past, and even Social Security may provide only a fraction of the support it gives today's retirees. Complete independence comes at a bigger cost, and it's clear that young investors recognize the challenge they face.

What it'll take to become a millionaire
Fortunately, young investors are in the perfect position to plan for their retirement. That's because they have time on their side -- as a result, they have a number of different strategies they can follow to reach that $1 million target.

As a starting point, consider how much you'd need to save in order to reach $1 million after 40 years, using the following assumptions about the returns you can earn:

If your average annual return is this:

Then saving this much will yield $1 million by 2049:

5%

$7,900

8%

$3,600

10%

$2,100

12%

$1,200

That gives you a great deal of flexibility. Although it's tough to find 5% interest rates on bonds right now, the average annual return on bonds has actually exceeded 5% historically over the long run. If you have less to save, a relatively conservative portfolio of dividend stocks like H.J. Heinz (NYSE: HNZ  ) , Kimberly-Clark (NYSE: KMB  ) , and Merck (NYSE: MRK  ) would pay you enough in quarterly dividends to get you halfway to an 8% return before the shares rise a single penny.

In contrast, if you only have 30 years to go before you retire, you'd have to save a whole lot more:

If your average annual return is this:

Then saving this much will yield $1 million by 2039:

5%

$14,400

8%

$8,200

10%

$5,600

12%

$3,700

You'd have to earn 12% to get the same results that 8% returns earned you in the 40-year example. That means a lot more reliance on growth stocks. Companies like Dell (Nasdaq: DELL  ) , Caterpillar (NYSE: CAT  ) , and Altria (NYSE: MO  ) have given returns that strong over long periods of time -- but they probably won't over the next 30 years. You'll need to scope out stocks like Lumber Liquidators (NYSE: LL  ) -- stocks that will be tomorrow's big-growth stories.

On the right track
It's good that young investors know what they're facing in their financial futures. By taking the right steps now, they'll avoid squandering precious time and set themselves up for long-term success. Just like them, you should aspire to become a millionaire.

Are your 20s a distant memory? Chuck Saletta thinks you're never too old to start investing.

Fool contributor Dan Caplinger plans to buy a Monopoly-style hat when he becomes a millionaire. He owns shares of Altria. Lumber Liquidators is a Motley Fool Rule Breakers pick. Dell is a Motley Fool Inside Value selection. Heinz and Kimberly-Clark are Motley Fool Income Investor picks. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy tells a story that's worth a million bucks.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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12/19/2014 4:01 PM
CAT $91.71 Up +0.02 +0.02%
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DELL.DL $0.00 Down +0.00 +0.00%
Dell CAPS Rating: *
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