If you aim to save $1 million for your retirement, you'll need to answer some questions first. The most important ones are: How much should you save each year, and for how long? Those answers will vary based on how aggressively or conservatively you are invested.
There are many different calculations for what percentage of stocks, bonds, and cash will make you a conservative, balanced, or aggressive investor. Here is what saving $1 million looks like for four different examples of these standard asset allocation models.
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1. Conservative
A conservative portfolio made up of 50% bonds, 30% cash, and 20% stock will get you a relatively low average rate of return in exchange for reduced volatility. Between 1926 and 2019, this mix of asset classes has earned an average annual return of 5.94%.
Asset allocation guidelines tell you that you should hold a conservative allocation when retirement is close. If you are in your 60s and entering a bear market when you plan to use your money, it could be devastating. Taking withdrawals while your accounts are down could deplete them even faster.
But this combination of asset classes isn't only best when you are older. Maybe you're younger and just don't have much of an appetite for risk. Sure, you have years before you will need your money, but market swings make you very nervous.
If you fit into this risk-averse category, you can build your nest egg with a conservative portfolio but it will come more from your contributions than market participation. If you can save $1,006.98 each month, and you earn the average annual return of 5.94%, you can accumulate $1 million in 30 years.
2. Balanced
With about 50% bonds or cash and 50% stocks, a balanced asset allocation model is typically best for you if you are in your 50s. Retirement is closer than when you started working, but you still have a number of years before it is a reality.
Even if you aren't in your 50s, this mix of stocks, bonds, and cash is a good option if downside protection from market losses is of greater value to you than potential upside. Between 1926 and 2019, the best 12-month period for an aggressive portfolio was a gain of 136.07%, and the worst 12-month period was a 60.78% loss. With a balanced portfolio, the best period was a 76.57% gain and the worst was a 40.64% loss.
Historically, a balanced portfolio will yield an average rate of return of 7.93%. This means that if you invested in it over 30 years and you earn this average annual rate, you could reach your $1 million goal by saving $680.57 per month.
3. Growth
With a growth portfolio, you'll still hold some bonds (about 30% is a good target in my view), but the rest of your investments are stocks. A growth portfolio is great if you are in your 30s and have decades before you will retire. But this mix could also be a good fit if you start saving when you are older and plan on retiring late.
If you have a growth portfolio, you'll get compensated for the extra risk you take with an average rate of return of 8.94%. This higher return will get you to $1 million in 30 years by saving only $553.08 each month and earning 8.94% on average annually.
4. Aggressive growth
An aggressive portfolio is almost all stock. I typically suggest those using an aggressive growth model to hold only about 15% in bonds. It's best only if you feel very comfortable with market volatility or are in your 20s and have a lot of time before you intend to use your money.
An aggressive portfolio can help you reach your goal faster and with less money. This could be especially helpful in your early working years when you make less money.
Because you are holding mostly stock, it has earned the highest return on average of 9.63% per year. If you earn this higher rate on average every year, you can hit your $1 million mark by saving $478.55 each month for 30 years.
Which is best for you?
Advice on how you should invest that is based solely on your age takes into account your ability for taking risks but not necessarily your willingness. Your age should be a factor in your overall mix of assets but not the sole determinant. Getting the most accurate asset allocation model will involve taking a risk tolerance quiz.
How you feel about volatility can also change as you get older and approach retirement. If so, you might end up with multiple asset allocation models throughout your life. You could also find that you can save more each month than you initially believed, getting you to your goal faster. Or maybe you run into some hardships along the way and it takes you a little longer. Whenever you make adjustments, just make sure your monthly contributions are modified as well.
The road that gets you to $1 million will take some planning and is unique to you; there isn't a magic formula that everyone can follow. Understanding how you feel about risk is the first step before creating your plan. From there, you can map out exactly how much money you should save and for how long in order to reach your goal.
