3 Ways to Grow $100,000 Into $1 Million for Retirement Savings

Key Points

You’ll need to accept a certain degree of risk and volatility if you intend to become a millionaire investing your savings.

Savings accounts, money market funds, and even elevated interest payments on bonds are less likely to get the job done.

Getting started as soon as possible is the key, even if your retirement contributions seem too small to matter.

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Of course, there's really only one way that will get you there soon enough to matter.

Would you like to retire with a nest egg of $1 million? Most people would. But doing so on an average income these days seems so out of reach that many people don't even bother trying.

What if, however, you only had to save up $100,000? While it's still a challenge for most households, that smaller goal certainly feels much more achievable. Plenty of people might even pinch pennies to make it happen.

The thing is, if you can get to the $100,000 early enough in life, you can get to $1 million in time for retirement. The time frame you have will dictate the path you take to grow that $100,000 into a seven-figure stash.

Here's a closer look at three different ways you can turn $100,000 into $1 million worth of retirement savings.

Earn 5.25% for 45 years

If you're not interested in doing anything with your money other than parking it in a bank account, at least do yourself a favor and put it in a money market fund at that bank. These funds aren't quite as liquid as deposits sitting in savings and checking accounts; you'll need to sell them (like an ordinary mutual fund) first if you want the money in a more liquid form. The process for doing so is pretty simple, and the money usually becomes available the first business day after the sale is requested.

Thanks to the recent rise in interest rates, the average annualized rate of return on a money market fund is right around 5.25%. Just bear in mind these rates will ebb and flow with changes to prevailing interest rates at any given time. When you reinvest any interest payments -- which you should -- you may not be getting the same 5.25%.

Also bear in mind that 45 years is a long, long time ... longer than most careers.

Earn 6% for 40 years

You can slightly shorten your savings time frame by looking beyond money market funds and exploring bonds. These aren't quite as liquid as money market funds, as it officially takes two days to settle a bond trade whether you're buying or selling. Also keep in mind that you may not be able to sell a bond for the same price you paid for it; their values fluctuate too, reflective of changes to market-based interest rates.

In most cases, you'll earn more interest on bonds than you will with a money market fund. Corporate bonds of decent, investment-grade companies are paying in the ballpark of 6% right now. Just remember that while the yields on your capital invested in a particular bond will remain fixed as long as you own it, the market's interest rates change over time. You may not be able to replace your maturing bonds at the same rate you enjoyed while you were holding them.

Pro tip: It may be easier to own a corporate bond exchange-traded fund (ETF) like iShares Broad Investment Grade Corporate Bond ETF if you choose to use this approach. It's a lot less work than regularly updating your bond portfolio.

Earn 10% for 25 years

Last but not least (and perhaps the most compelling option), earning a compounded rate of return of 10% on $100,000 will get you to $1 million in just a little less than 25 years.

Again, this return figure isn't pulled out of a hat. That's the average annual long-term return on the S&P 500, which you can mirror for yourself with a fund like the SPDR S&P 500 ETF Trust.

There's a bit of a catch, though. The stock market's overall returns are the least consistent and the most volatile. There will even be years in which your investments lose value. That said, if you stick with them, you'll also find the stock market has a knack for bouncing back. Five years after the dot-com crash hit bottom in 2002, the S&P 500 was up 102% from that low, according to data compiled by investment-management outfit MFS. Ten years after the S&P 500 hit made its hard landing in the wake of 2008's subprime-mortgage meltdown, the S&P 500 was up 306% from that low.

Only one way really works for most people

The first couple of options aren't realistic ones, at least not by themselves. It can take many years just to save up $100,000 worth of investable cash. Most people don't have another 40 or more years after that to grow this money to the $1 million mark. Inflation can take a toll in such a time frame as well. Then, there's the issue of taxes, which take another bite out of your buying power.

The point is that the only plausible path to a self-grown, seven-figure retirement nest egg over the course of the average career is through the stock market. Its higher volatility is something you'll have to be mentally prepared for before it happens.

You'll also want to prepare for discouragement in the earliest years of your investing life. Growth seems agonizingly slow then because most of the growth to your retirement fund is coming from new contributions; you don't start earning any real money on your capital's historical growth until the midpoint of your savings period -- that's when the compounding really takes off. Investing becomes a much more satisfying endeavor then, and you just have to pay your proverbial dues in the meantime.

If you need help getting started down this road or would like to improve your overall returns, the Motley Fool has a variety of resources to help you do so.