Many people have the goal of retiring with $1 million to their names. But actually saving $1 million isn't such an easy thing to do.
The good news, though, is that you don't have to part with $1 million of your earnings to end up with a $1 million nest egg. If you make an effort to save a smaller amount, like $100,000, with the right strategy, you can grow that sum 10 times over. Here's how.
1. Start early
The more time you give your money to grow, the more wealth you're apt to accumulate over time. Let's imagine your goal is to retire at age 65 and you manage to save up $100,000 by age 45. If you were to invest that $100,000 at an average annual 8% return, which is a bit below the stock market's average, you'd wind up with $466,000 after 20 years.
That's not a small amount of money, but it's also not $1 million. However, if you were to kick off your savings efforts earlier so as to invest that $100,000 by age 35, not 45, you'd give your money 10 extra years to benefit from compounded returns. And in that scenario, you'd be looking at a $1 million balance, assuming that same average yearly 8% on your money.
2. Don't pay needless taxes
Whenever you sell investments at a profit in a regular brokerage account, you're liable for taxes on that sum. But if you invest in a 401(k) plan or IRA, you won't pay taxes on capital gains year after year. That, in turn, will free up more money you can keep investing.
3. Invest aggressively
The 8% return we used in our example above was based on a stock-heavy portfolio. There's clear risk associated with buying stocks. But if you play it too safe with your investments, you might generate a much lower return on your money over time, making it difficult to turn $100,000 into $1 million.
If you're nervous about buying specific stocks for your retirement, take the pressure off by loading up on broad market index funds, instead. The beauty of index funds is that they take the guesswork out of investing so you don't have to stress.
4. Reinvest your dividends
You may end up investing in stocks that pay you dividends on a regular basis. If so, you have options. You can cash out those dividends on the spot and enjoy the money, or you can reinvest your dividends for added growth. If your goal is to amass a large retirement nest egg, the latter approach is really your better bet.
It pays to think big
No matter what you envision yourself doing in retirement, the reality is that the more money you bring with you, the more options you'll buy yourself. And if you start putting your money to work early, save in the right accounts, invest aggressively, and make good use of your dividend payments, you'll put yourself in a great position to pull off the retirement of your dreams.