Investing for retirement can seem like a daunting task. Many of us want to see our investment portfolios eventually cross that $1 million mark. While it's truly just an arbitrary marker ($999,999 is only $1 less than $1 million), it can be fulfilling to see two commas next to an account with your name on it. But how does one get over the $1 million hurdle? It is actually much easier than it sounds.
Here are four easy ways to help grow your nest egg from $100,000 to $1 million.
1. Start early
The first and most important thing when trying to build your investment portfolio is to start early. Ideally, this means you start saving and investing immediately when you start earning a steady income, which for most people is sometime in their early 20s. Let's go through some examples to illustrate this importance.
If you have $100,000 saved up by the time you are 30, and expect an 8% compound annual growth rate (CAGR) for your portfolio (which is close to the long-term total return of the U.S. stock market), it will take around 30 years until you hit that $1 million mark. This puts you at the age of 60, which is generally when people think about retiring. But if you wait until you are 40 or even 50 to start investing your savings, you might not hit that $1 million goal until you are much older, causing you to miss some of those key retirement years.
2. Stay safe and don't day trade
Okay, so we know that starting early is important. But what should you invest in? With so many options out there, it can seem like a daunting task to decide what goes into your portfolio.
I think it is easiest to invert the situation and lay out what investors should not do. First, you should stop day trading or having an extremely active portfolio. It is estimated that the vast majority of day traders lose money, no matter what the advertisements say, so you are trying to surmount terrible odds. Second, a good retirement portfolio is not irrationally concentrated and should have enough diversification through either index funds or 20+ stocks. Third, you should avoid unprofitable businesses that haven't proven they have a sustainable business model.
To sum it up, to build a successful portfolio for the long term, you should:
- Avoid day trading
- Diversify through index funds or 20+ individual stocks
- Avoid unprofitable companies
Do these three things and you'll likely see your portfolio grow at a solid compound annual growth rate over the next few decades.
3. Reinvest dividends
While the two most important things are to start early and stay safe, there are also some small things you can do to optimize your returns without adding any extra money to your portfolio. One thing all young investors should do is reinvest dividends. This is an automated task that almost all brokerages will offer that takes your dividend payouts and buys even more shares of the stock you own.
By helping you own even more shares each and every year, reinvesting dividends can help improve your shareholder returns over the long haul.
4. Invest tax-free
Lastly, investors -- at least in the United States -- should use tax-advantaged accounts when investing for retirement. Most people pay 15% on long-term capital gains, meaning that if you have $1 million in gains, $150,000 of it will go to Uncle Sam.
However, if you use a Roth IRA, all these capital gains come tax-free. Most people can add $6,000 a year to a Roth IRA, which is plenty for trying to build up retirement savings over many decades. Use this account type, which is offered at many brokerages for free, to invest your savings instead of a standard investing account. It will save you a ton in taxes when you are older.
