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
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
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.