It may seem complicated and like a lot of hard work, but becoming a millionaire is really child's play. No, seriously. Let's do the math. Trust me: It won't be at all taxing.
No long division required
Let's say you're 40 years old and want to retire with a million bucks in the bank by the time you're 65. What's the best way to proceed?
Well, considering that between 1926 and 2006, the S&P 500 returned an annualized 10.5%, you might opt to sock $700 each month into a low-cost S&P tracker such as Vanguard 500 Index (VFINX), which sports an expense ratio of just 0.18%. If you "set and forget" your monthly investment in Vanguard's flagship fund -- and if the market delivers at its historical rate -- you'll have more than a million bucks in the bank ($1,011,828, to be exact) by the time you hit your target age.
Happy birthday to you.
Pop quiz
Q: What do ExxonMobil (NYSE:XOM), Citigroup (NYSE:C), and Microsoft (NASDAQ:MSFT) have in common?
A: Each appears in the top 10 holdings of 500 Index and, for the 10 years that ended with January, all of 'em beat the S&P as well. Taken together, that hot stock troika delivered a total average return of 13.3% on an annualized basis. Impressive, no?
Impressive, yes, and that showing illustrates just what savvy stock-picking can do to rev up your retirement road trip. Indeed, at an annualized rate of 13.3%, your $700/month journey will be considerably shorter, with our hypothetical 40-year-old achieving that million-dollar goal by age 62.
You can do even better than that, too. "Growthier" stocks like Dell (NASDAQ:DELL) and Comcast (NASDAQ:CMCSA) have notched 10-year annualized gains in excess of 15%, for example. That's also true of Caterpillar (NYSE:CAT) and Lowe's (NYSE:LOW), two companies whose price-to-earnings (P/E) ratios currently clock in below that of the broader market.
The Foolish bottom line
Past performance is famously no guarantee of future results, so you should regard the examples above as illustrative rather than prescriptive. You should also be sure to build a portfolio that provides well-rounded exposure to both growth stocks and the kind of defensive plays that can help protect your nest egg.
Like some assistance on those fronts? No problem. We've covered both investing flavors in Motley Fool Green Light, where you can also get the inside scoop on how to invest with your significant other, as well as a game plan for eliminating the debt you may have racked up during last year's holiday season. In the issue we're prepping now, we provide guidance on how to make the most of your IRA -- even if you're still mulling your investment options.
Best of all, it won't cost a thing. Click here, and a risk-free guest pass to Motley Fool Green Light is free for 30 days. Your pass provides access to our archives, current newsletter issue, and advisor blogs to boot. There's no obligation to stick around if you find it's not for you.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Microsoft and Dell are Motley Fool Inside Value recommendations. Dell is also a Stock Advisor pick. You can check out the Fool's strict disclosure policy by clicking right here.
