Please ensure Javascript is enabled for purposes of website accessibility

The Sleepwalking Millionaire

By Shannon Zimmerman – Updated Mar 7, 2017 at 1:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's how to reach your financial goals and get your beauty rest.

A million dollars seems like a lot of money because, well, it is a lot of money. Thing is, racking up that sum isn't nearly as difficult as most folks imagine. Indeed, after putting just a few sound financial principles into action, you can basically sleepwalk your way to financial independence. Here's a two-step plan (pun intended) for doing just that.

1. Take maximum advantage of your company-sponsored retirement plan.
The 401(k) contribution limit for tax year 2007 weighs in at a hefty $15,500. Even if you can't kick in quite that much, do everything you can to contribute enough to take full advantage of your employer's matching contribution, if one is provided. Hey, that's free money -- and because your contributions will be automatic, once you set the wheels in motion, they'll just keep turning without additional work on your part.

And just how far will those wheels take you? Quite a long way. A 40-year-old who kicks in $10,000 each year between now and age 62 will have more than $760,000 if those investments match the S&P 500's historical rate of return: 10.5% annualized.

Not too shabby, eh?

2. Fully fund a Roth IRA and watch the tax man vanish.
Impressive though the above figure is, you still have some work to do if you want to be a millionaire by the time retirement rolls around. Enter the Roth IRA. Set one of these puppies up, kick in the maximum each year ($4,000 for 2007), and voila: At the end of 22 years, you'll have nearly $305,000 at 10.5%. And get this: Uncle Sam won't expect a dime on the withdrawals, either.

That deal is sweet, indeed, particularly because, unlike with your company-sponsored retirement plan, you're in the driver's seat. You might choose to invest in individual stocks, bonds, or -- if you're looking for a no-muss, no-fuss vehicle -- mutual funds.

Indeed, world-class, actively managed funds make great candidates for IRAs because you won't have to pay taxes on the capital gains and dividends they generate. Still, even if you opt for a "no-brainer" lineup of index picks, you can improve your odds of earning a rate better than 10.5% -- and of becoming a sleepwalking millionaire even sooner. For example, the iShares Russell MidCap Value (IWS) exchange-traded fund -- which counts ProLogis (NYSE:PLD), Hess (NYSE:HES), and Edison International (NYSE:EIX) among its holdings -- tracks a benchmark that cranked out an annualized return of 14.91% for the 15 years that ended with March 2007.

Meanwhile, MidCap Value's bigger brother -- the namesake benchmark of iShares Russell 1000 Value Index (IWD) -- has managed "just" 13.04% annualized over that stretch of time. Investors who track this bogey are hitching their wagons to big boys such as Occidental Petroleum (NYSE:OXY) and Dow Chemical (NYSE:DOW). Marathon Oil (NYSE:MRO) and Comcast (NASDAQ:CMCSA) are in the mix, too.

No matter which way you go, the bottom line with Roth IRAs is this: The market is your oyster. Feel free to pick pearls -- and watch 'em grow, tax-free.

The Foolish bottom line
Taxable accounts should be a part of your investment mix, too, and as it happens, the March issue of Motley Fool Green Light provides fast-action tips to help you determine which investments are best suited for both taxable and tax-favored accounts. In past issues, we've helped members make the most of even lousy 401(k) plans, and we've done the homework (so you don't have to!) on growth stocks trading at a discount and on more defensive plays that can help preserve and grow your nest egg.

The upshot? If you'd like some assistance when it comes to painting your big financial picture, Motley Fool Green Light is here to help. Click here, and you'll have 30 days to peruse the service (for free!) and see how you can use it to sleepwalk your way to a million bucks. There's no obligation to subscribe, so give us a go ... and pleasant dreams!

This article was originally published on Feb. 9, 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. Dow Chemical is an Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$31.84 (-1.94%) $0.63
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW
Marathon Oil Corporation Stock Quote
Marathon Oil Corporation
MRO
$21.90 (-10.94%) $-2.69
Hess Corporation Stock Quote
Hess Corporation
HES
$104.60 (-8.57%) $-9.80
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
OXY
$58.73 (-5.09%) $-3.15
Edison International Stock Quote
Edison International
EIX
$64.86 (-1.43%) $0.94
Prologis, Inc. Stock Quote
Prologis, Inc.
PLD
$108.60 (0.06%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.