For many people, $1 million in savings is a huge goal for building retirement wealth. Saving $1 million from the income you earn is not easy to accomplish, but luckily there are easy ways to grow a smaller amount of money into $1 million through your working years.
The best strategy for most people is to put their money in the stock market. But what does that mean? If you have little experience buying stocks, this can seem like a daunting and/or confusing task.
Investing is not nearly as hard as it seems at first glance. Here are four tried and true methods for turning $100,000 into $1 million in retirement savings by investing in the stock market.
1. Buy high-quality businesses (or an index fund)
Before getting to the nitty-gritty on how to optimize your portfolio, you need to find things to actually invest in. The best way to do this is to keep it simple and buy the stocks of quality businesses with strong track records of success.
There are many ways to identify a high-quality business, but the key things to look for are industry leaders, dependable business models, and a long-term track record of growth. Diversify your $100,000 into 20 or more of these stocks, and it will be tough to lose money over the long haul.
If you don't want to dabble with individual stocks, your best course of action is to buy a U.S. or all-world index fund, which will track the performance of the entire stock market. That way, you have exposure to high-quality businesses that might turn into the next Amazon, Apple, or Tesla, but without the need to do nearly as much research.
2. Give yourself enough time for success
This section may be discouraging if you started investing very late in your career, but it should be encouraging if you are still in your 20s or 30s. Patience and a long-term time horizon make it much easier to build wealth in retirement.
For example, to turn $100,000 into $1 million over 30 years, all you need is a compound annual growth rate (CAGR) of 8%, which is right around the market average. If you want to do the same over 10 years, you need to generate a CAGR of 26%, which only a few legendary investors have ever been able to achieve. Frankly, you are likely not one of these people.
You shouldn't expect your wealth to move up in a straight line every year, either. Bear markets are a normal part of the investing process, as 2022 is painfully showing us. That's why you need to have a multi-decade time horizon when building wealth for retirement. Don't bet on turning $100,000 into $1 million within 10 years unless you take a lot of risks and get a few lucky breaks, which is not a repeatable process for success.
3. Minimize taxes
An easy way to maximize your wealth that few people focus on is by minimizing taxes. For most people, the best way to do this is investing through a Roth IRA. This allows you to invest tax-free as long as you don't take out your gains until you turn 60, which is right around retirement age for most people anyway.
Using a Roth IRA versus a regular investing account can help once you start selling your stocks and spending in retirement. For example, if our scenario from the above section was applied to a regular investing account, the investor would have $900,000 in taxable gains ($1 million minus the $100,000 starting amount), which at a 10% tax rate would mean $90,000 given back to Uncle Sam. If the money was put into a Roth IRA, there would be no taxes to pay if you start taking out money after the age of 60.
4. Add to your portfolio each year
If you have $100,000 saved up, you likely have enough income every month to consistently add to your investment portfolio. This can help you add even more gains to your retirement portfolio, giving you more flexibility in your elder years.
Let's go through an example. Under our original scenario (8% CAGR, 30-year timeframe, $100,000 starting amount), an investor would have slightly over $1 million at the end of year 30. But if that same person contributed $200 a month to their account over 30 years, their investment portfolio would be worth over $1.3 million by the end of the scenario. It's not a monumental difference, but it's a nice $300,000 bump compared to just setting $100,000 aside and adding nothing more.