Here are some interesting statistics: According to a survey taken earlier this year, about one-third of American workers, 32%, say they would need more than a million for retirement to live comfortably. When asked how they're doing regarding retirement savings, 37% of respondents said they are right on track or ahead of where they should be -- and a hefty 45% of Gen Zers (aged 18 to 26) and millennials (aged 27 to 42) said that.
So...young people are feeling confident. Well, that's good -- they should. Because most young people have the ability to retire as millionaires, if not multimillionaires, due to having a lot of time. You might be able to retire a millionaire, too.
Image source: Getty Images.
Millionaire math
Amassing significant sums of money depends on three factors:
- How much you invest (ideally, regularly)
- How quickly your money grows
- How long your money has to grow
Let's take a closer look at each of those factors.
How much you invest
You might, of course, have a huge lump sum -- perhaps from an inheritance -- you can invest for retirement. Most of us, though, will simply be saving and investing throughout our working lives.
It's often suggested that we sock away 10% of our incomes for retirement, but for many people, that's not enough, especially if they're getting a relatively late start. Consider instead saving as much as you can -- especially in your early investing years because that money will have the longest time to grow for you. Your earliest invested dollars tend to be your most powerful ones.
How quickly your money grows
Next, give some thought to how you invest your money. There's a trade-off between risk and reward. If you take on low risk, such as by investing in relatively safe things like savings accounts or certificates of deposit (CDs), you'll usually earn relatively low returns. If you shoot for the moon, buying lottery tickets, that's too risky.
For many, if not most, people, the stock market will be the best road to long-term wealth. The table below shows the returns of various asset classes between 1802 and 2021, per Wharton Business School professor Jeremy Siegel.
|
Asset Class |
Annualized Nominal Return |
|---|---|
|
Stocks |
8.4% |
|
Bonds |
5.0% |
|
Bills |
4.0% |
|
Gold |
2.1% |
|
U.S. dollar |
1.4% |
Source: Stocks for the Long Run, Jeremy Siegel.
See? It's hard to beat stocks. (Of course, you will likely average a little or a lot more or less than that 8.4% over your particular investing period.)
How long your money has to grow
Then, there's the time factor, which gives young people such a huge advantage. Check out the table below showing what can be accomplished over decades if you invest regularly and your money grows at 8% annually.
|
Growing at 8% for |
$5,000 Invested Annually |
$10,000 Invested Annually |
|---|---|---|
|
5 years |
$31,680 |
$63,359 |
|
10 years |
$78,227 |
$156,455 |
|
15 years |
$146,621 |
$293,243 |
|
20 years |
$247,115 |
$494,229 |
|
25 years |
$394,772 |
$789,544 |
|
30 years |
$611,729 |
$1,223,459 |
|
35 years |
$930,511 |
$1,861,021 |
|
40 years |
$1,398,905 |
$2,797,810 |
Source: Calculations by author.
Each of us is different, of course, and not everyone can invest $5,000 or $10,000 annually. However, aim to invest what you can and increase that amount regularly, too. You might start with $400 per month (close to $5,000 annually) and, over time, increase that to $1,000 or more per month.
So, even if you're not a Gen Zer or millennial, you can grow considerably richer. Someone who's 45 now has 20 years to invest before they turn 65, and if they can keep at it until age 70, they have 25 years.
How to invest to become a millionaire
If you're now eager to invest in stocks for the long run, great! You can take some time to read up on investing and become a savvy stock studier -- or you can instead opt for simple yet powerful index funds that track a major broad-market stock index (such as the S&P 500).
Here are some index funds to consider:
- iShares Core S&P 500 ETF (NYSEMKT: IVV)
- SPDR S&P 500 ETF (NYSEMKT: SPY)
- Vanguard Total Stock Market ETF (NYSEMKT: VTI)
- Vanguard Total World Stock ETF (NYSEMKT: VT)
If you want to include some individual stocks in your portfolio, aiming for a greater-than-average return, you might add some growth and/or value stocks to your mix. Not all will perform as expected, though, so it's smart to spread your dollars across a bunch of them.
Our Foolish investing philosophy suggests buying into around 25 or more companies and aiming to hang on to your shares for at least five years. (If you find you're not such a hot stock picker, there's no shame in just sticking with good old index funds.)
So don't assume you can't build meaningful wealth -- because you probably can. Given enough time or big enough investments, you might even become a millionaire or multimillionaire. Don't leave your retirement up to chance -- and just Social Security.
