Picking good stocks and then holding them for the long term is a popular strategy here at the Fool. The success that many of our newsletters have had using that basic strategy in different ways makes it clear why you read so much about it.
Yet making a comfortable retirement for yourself isn't just about finding the next Microsoft (NASDAQ:MSFT) or Wal-Mart (NYSE:WMT). While outstanding returns from particular stocks could give you a retirement that's well beyond your current expectations, you might be skeptical about your chances of choosing the next 100-bagger for your own portfolio.
It's the little things that count
Financial peace of mind comes from doing a lot of simple things. Maybe you're not the next stock-picking genius, like Warren Buffett or Peter Lynch. That's OK -- you don't have to be.
Here are four easy ways to be well on your way to accumulating a million-dollar nest egg:
- Take human bites. Every little bit you add to your investments can mean a lot down the road. In 2007, the maximum limit you can contribute to your 401(k) retirement plan is $15,500. But that's a lot of money for most people to put aside. That's why you should put aside anything you can afford, even as little as $50 or $100 a month.
- Accept government handouts. No, I'm not talking about welfare payments; after all, that's what you're trying to avoid. I mean ensuring you're making pre-tax contributions to your retirement plan. When you invest $100 per month in your 401(k), you're essentially getting between $10 and $35 of free money from the IRS in the form of lower taxes, depending on your tax bracket.
- Play with matches. Check to see if your employer offers matching contributions. A 50% match on that $100 a month would give you an extra $600 each year. Add in the tax benefits and you could add $1,800 to your 401(k) this year while reducing your paycheck by as little as $65 every month. To take advantage of all the free money your employer will give you, try to put away at least as much as the maximum your employer will match.
- Get to know Roth and IRA. Individual retirement accounts are a great way for people to save for the future. Roth IRAs make them even better. The contributions you make to a Roth aren't tax-deductible, but the money grows in the account tax-free. So after you contribute to your company's 401(k), make sure you put aside additional money in a Roth IRA. Most people can contribute up to $4,000 to an IRA in 2007.
Starting early is essential. If you start saving when you're 30 and can come up with that $1,800 every year for the next 35 years, earning just the stock market's historical average of 10.5% a year, then you'll have accumulated more than $600,000. Add in an extra $100 a month to a Roth IRA and you'll end up with another $400,000 toward your retirement.
$1 million -- easy as 1-2-3-4
And there you have it -- a million-dollar retirement nest egg by doing little more than contributing $100 a month each to your company's 401(k) and a Roth IRA. You didn't have to spend thousands getting an MBA to learn the investing secrets of the masters. You didn't have to find the best-performing stocks of the decade. As a matter of fact, you didn't have to pick a single stock at all! You could achieve these returns simply by picking a broad-market index fund like Vanguard Total Stock Market (AMEX:VTI), an exchange-traded fund.
Of course, you can juice those results by earning returns above the market averages while investing in some of the stock recommendations you'll find in the Fool's stock newsletters. But if you don't have the time, energy, or inclination to follow a passel of stocks, it's still within your means to achieve a million-dollar portfolio.
A Foolish recommendation
Simple ideas like these are what motivate Foolish retirement expert Robert Brokamp and the Fool's Rule Your Retirement service. Just by using the many resources you'll find in every monthly issue, you'll be able to perfect your retirement needs through appropriate asset allocation, savings tips, and tax-saving strategies. Get started today risk-free with our 30-day free trial.
Fool contributor Rich Duprey owns shares of Wal-Mart, but does not own any of the other stocks mentioned in this article. You can see his holdings here. Wal-Mart and Microsoft are Inside Value picks. The Motley Fool has a disclosure policy.
