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.
Q: What do ConocoPhillips
A: At the close of 2006, each appeared in the top 20 holdings of 500 Index and, for the 10 years that ended with February, all of 'em beat the S&P as well. Taken together, that hot stock troika delivered a total average return of 13.2% on an annualized basis. Impressive, no?
That showing illustrates just what savvy stock picking can do to rev up your retirement road trip. Indeed, at an annualized rate of 13.2%, 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 Cisco
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 current issue, we provide guidance on how to make the most of your IRA cash while you mull 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.
This article was originally published on Feb. 22, 2007. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. Wal-Mart is an Inside Value recommendation. You can check out the Fool's strict disclosure policy by clicking right here.