The miraculous thing is that growing $100,000 into $1 million for retirement requires no advanced financial knowledge and no specialized degree. There's also no need to try to figure out which sector will go up next, or which stock is destined to become the next Amazon.
By following a few key principles and getting the basics right, you'll be well on your way to a seven-figure portfolio. Here, we'll look at three tactics to grow your money into and through retirement.
1. Commit to an investment strategy
Over time, the U.S. stock market has returned in the neighborhood of 8% to 10% annually. But this long-term return only becomes available to those who are willing to commit to their investment strategy long-term; It's not for those likely to sell at the first sight of market turmoil. Many people turn to broad-market, low-cost index funds to access this return.
Here's how your $100,000 could look in 30 years by simply allowing the market to continue its ride higher:
| Current Portfolio | Rate of Return | Annual Additions | Years to Retirement | Estimated Future Value |
|---|---|---|---|---|
| $100,000 | 12% | $0 | 30 | $3,000,000 |
| $100,000 | 10% | $0 | 30 | $1,745,000 |
| $100,000 | 8% | $0 | 30 | $1,000,000 |
The beauty of the above table shows that even at an annual return of 8%, achieving $1,000,000 is possible by simply letting the market do the work. Another striking feature of this table is that in all cases, you get to your desired future value without any annual additions.
The commitment to a long-term investing strategy through which you'll have the chance to capture the market's entire return over a significant period of time is a vital ingredient in growing your portfolio.
Image source: Getty Images.
2. Save early and aggressively
If you're currently sitting on $100,000, another way to supercharge your investments is to add to the pile aggressively. The sooner you do this, the better. In other words, the longer your money has to compound in the market, the greater the balance will be when you approach retirement.
By adding $12,000 per year starting with a shorter time horizon (say, 20 years from retirement), let's look at how your investments may perform:
| Current Portfolio | Rate of Return | Annual Additions | Years to Retirement | Estimated Future Value |
|---|---|---|---|---|
| $100,000 | 12% | $12,000 | 20 | $1,829,000 |
| $100,000 | 10% | $12,000 | 20 | $1,360,000 |
| $100,000 | 8% | $12,000 | 20 | $1,015,000 |
Besides starting as early as you can, periodically adding money to your portfolio is a tried-and-true way of growing your investments over time. While the return assumptions here are on the aggressive end, it's entirely possible that your portfolio could look like this assuming you follow a disciplined saving strategy.
3. Mind your fees
One of the most useful ways to view investment fees, especially those expressed as a percentage, is as negative return. Very few investment advisors charging asset-based fees are able to beat the market over substantial periods of time; Therefore, it's in your best interest to learn how to self-manage your investments to keep costs low.
This is not to say all advisors are bad. If you're in need of investment advice, it makes sense to visit a fee-only financial planner that charges hourly or in a fixed-fee format. Additionally, it's important to verify that the planner is a fiduciary (someone who is legally obligated to act in your best interest) at all times.
Simply put, costs matter in investing -- especially over time. Excess fees can have the unpleasant effect of adding years onto your working life, so tread lightly. Remember: A 1% annual fee may sound small, but in reality, you'll be giving away a significant chunk of your long-term returns.
Simplicity is key
The rules of math work the same if you have $100,000 or many millions of dollars. The basic truth is that you'll need to commit to a long-term investment strategy, save early and often, and sidestep high fees when possible. If you get these foundational details right, the chances of you becoming a retirement millionaire will rise tenfold.
