One of the most valuable lessons when it comes to investing is that it's often much easier to turn a small nest egg into a large one than it is to get that small nest egg started in the first place. Indeed, the path from $100,000 to $1 million may very well be much more straightforward than getting from a starting point of a negative net worth to that first $100,000.
That's at least in part because compounding can really start working for you once you have a solid foundation in place. At $100,000, the balance is enough to where compounding can really make a difference. At the same time, that balance is still small enough to be an achievable aspiration for most people who make a concerted effort to get there. As an inspiration to get to that first $100,000, here are four ways to grow $100,000 into $1 million for your retirement savings.
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No. 1: Let that compounding work its magic
At a 10% annualized rate of return -- not far off from the stock market's long-term average -- $100,000 can turn into $1 million in just a shade over 24 years. As a result, if you can reach $100,000 in your retirement accounts by your early 40s, you might just be able to stop contributing and simply watch the power of compounding help you retire a millionaire.
Of course, that does presume that the market's long-term future will look like its long-term past. That is anything but guaranteed. If the market returns only 6%, for instance, it will take nearly 40 years for compounding alone to get you there. As a result, while it may be possible for compounding alone to get you from $100,000 to $1 million, it is probably not your strongest or fastest approach.
No. 2: Keep on socking new money away
For you to reach that initial $100,000 milestone, you were probably saving money at a decent clip. If you can keep up that savings, you can drastically improve your chances of reaching a $1 million nest egg in a much shorter period.
The following table shows how many years it will take to build your nest egg from $100,000 to $1 million, based on how much you're able to save each month and what rate of return you earn along the way. As you can tell, that has the potential to be much faster than simply letting your existing savings compound for you.
|
Monthly Savings |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
$2,416.66 |
12.1 |
13.6 |
15.6 |
18.5 |
|
$1,875.00 |
13.4 |
15.3 |
17.8 |
21.5 |
|
$1,000.00 |
16.4 |
19.2 |
23.2 |
29.6 |
|
$500.00 |
19.0 |
22.8 |
28.5 |
38.3 |
Data source: author.
The savings amounts in those first two rows represent amounts that are achievable within typical retirement plans. Employees under 50 can typically sock away up to $22,500 per year in their 401(k) plans at work and an additional $6,500 per year in their IRAs on their own. The top row represents maxing out both a 401(k) and an IRA, while the second row represents only maxing out the 401(k).
No. 3: Stay invested even when the market is rough
Almost as long as there have been stock markets, there have been stock market crashes. Yet over the long haul, markets have recovered and gone on to set new highs. To take part in any recovery that may happen, you need to be in a position to stay invested even when the market moves against you.
A key strategy to make that a reality is to make sure the money you have invested in stocks is money you don't expect you'll need for at least the next five or so years. It's always tough to watch the market drop, but it's especially tough to do so if the money you've got invested is money that you need to make next month's rent. By being safer with money you expect you'll spend soon, it's much easier to stay invested during the down times to make it through to any recoveries that may follow.
No. 4: Invest in broad indexes
Of course, if the recent bank collapses offer any key lesson, it's that even seemingly strong companies can see their stock values evaporate in a worst-case-scenario type situation. As a result, one key strategy to help protect your overall portfolio is to invest in low-cost, broad-based index funds. That way, even if a handful of companies in that index fail, it won't completely devastate your overall portfolio.
That diversification is the upside of broad-based index funds, but investing in them also means that your returns will likely be more or less in line with the underlying index. Index investing isn't likely to set the world on fire, but it also means you don't have to try to separate the winners from the losers.
Get started now
Regardless of whether you've got that starting $100,000 nest egg or are still working to build it, it will take time to get that money to grow to $1 million for your retirement. The sooner you get started putting your plan in place, the more time you will have on your side. So get started now, and give yourself your best chance of reaching millionaire status by the time you retire.
