Will a $1 million nest egg buy you your dream retirement? Maybe.
The reality is that many people fixate on that $1 million savings target without putting a lot of thought into what it actually means for them. But if the idea of saving $1 million sounds good to you, then it's important to take the right approach to building wealth.
To amass a large nest egg, you'll need to part with some of your money -- that's a given. But you may be able to turn $100,000 in 401(k) or IRA contributions into a nest egg worth $1 million in your lifetime. Here's how.
1. Give yourself a lengthy savings window
The more time you give your money to grow, the more likely you'll be to turn a series of modest retirement plan contributions into a larger sum. So it pays to start saving and investing your money from the moment you start collecting a paycheck.
Many 20-somethings bypass the opportunity to build retirement wealth because they figure that milestone is really far off. But while it's hard to focus on retirement when you're decades away from it, the reality is that the sooner you do, the more opportunity you'll have to benefit from compounded returns in your portfolio.
2. Choose investments that lend to steady growth
If you're the risk-averse type, you may not love the idea of filling your portfolio with stocks, since they can be volatile. But you may need to push yourself outside your comfort zone if you're intent on growing wealth. If you play it too safe, you might stunt your savings' growth in a very big way.
That doesn't mean you have to take on the risk of hand-picking stocks and hoping for the best. If you're too nervous to choose individual companies for your portfolio, load up on broad market index funds instead. Or, do a mix.
Most importantly, make sure to branch out into different corners of the market when choosing investments, rather than limiting yourself to a few segments only. That could mean buying a mix of tech stocks, energy stocks, bank stocks, healthcare stocks, and real estate stocks.
3. Maximize dividend payments
You may decide to invest your money in companies that pay dividends to their shareholders through the years. And that alone gives you a great opportunity to grow your retirement plan balance. As those dividend payments come in, you can reinvest them steadily so you're building your portfolio over time without having to put in more of your own money to invest.
That said, it's important to look outside of dividends when choosing companies to invest in. While the idea of collecting that extra money might seem appealing, you'll need to look at how well those companies are doing financially. It may be the case that a company is paying a nice dividend, but is also hemorrhaging cash.
Don't sell yourself short
You might think that a $1 million nest egg isn't attainable. But if you start early, assemble the right mix of investments, and take advantage of dividend income, you may be surprised at just how quickly -- and impressively -- your savings take off.