The million-dollar mark has long been a stamp of financial success. It may not stretch as far as it used to a couple of decades ago, but it's still a significant milestone worth aiming for and celebrating.
For some people, retiring as a millionaire is a lifelong dream that signifies the ultimate financial security. For others who may have higher financial needs or retirement ambitions, the million-dollar mark could be a necessary nest egg needed to last them through their golden years.
Regardless of your reason for wanting to retire a millionaire, here are three things that can push you closer to that goal.
Image source: Getty Images.
1. Take advantage of the greatest asset on your side: Time
Sometimes, the most challenging part of investing is simply starting. Unfortunately, that's typically the most crucial part, especially when considering the power of compounding. In investing, compounding occurs when the returns on your investments begin to generate their own returns.
When you earn 10% on a $1,000 investment, you make $100. When you reinvest that $100 and earn another 10%, you're now earning $110. When you reinvest that $110 and earn another 10%, you're now earning $121. It's a lucrative cycle.
Most people don't have the lump sum of money needed to hit the million-dollar mark from a single investment, but consistency and compound earnings can lead the way and take on the bulk of the work. For perspective, let's imagine someone invests $500 monthly and averages 10% annual returns (roughly the long-term average of the S&P 500).
| Years Invested | Personally Invested | Ending Value |
|---|---|---|
| 10 | $60,000 | $95,600 |
| 15 | $90,000 | $190,600 |
| 20 | $120,000 | $343,600 |
| 25 | $150,000 | $590,000 |
| 30 | $180,000 | $986,900 |
Data source: Author calculations. The ending values are rounded down to the nearest hundred.
I added a column to show how much was personally invested over those spans because it highlights the true power of compound earnings. In each timespan, the amount someone contributes is far less than the ending value of their investments. This gap widens with time, too.
2. Use a Roth IRA to save thousands on taxes
Reaching a million dollars with your investments should be motivating and celebrated, but we can't forget Uncle Sam. Capital gains and dividends are taxable whenever they are realized in non-retirement accounts. To work around this, it's helpful to take advantage of a Roth IRA.
A Roth IRA is a retirement account that allows you to contribute and invest after-tax dollars and then take tax-free withdrawals in retirement. It can be a cheat code for retirees looking to save money on taxes. For 2024, here are the capital gains tax brackets for single and married people filing jointly:
| Filing Status | 2024 Bracket for 15% Capital Gains Tax | 2024 Bracket for 20% Capital Gains Tax |
|---|---|---|
| Single | $47,026 to $518,900 | More than $518,900 |
| Married and filing jointly | $94,051 to $583,750 | More than $583,750 |
Data source: IRS.
Looking at the capital gains tax rates, we can see that every $10,000 in capital gains translates into $1,500 to $2,000 owed in taxes. For people who consistently invest through the years, a Roth IRA can easily save five figures in taxes.
3. Lean into the power of reinvested dividends
In a world where a company's stock price growth or decline is constantly displayed, dividends can sometimes slide under the radar in their impact. They're not as flashy as some growth stocks, but dividends can account for a lot of investors' total returns over time.
From 1960 to 2022, reinvested dividends accounted for 69% of the S&P 500's total returns, according to research from Hartford Funds. A $10,000 investment in the S&P 500 10 years ago would be worth just under $26,000 today based on stock price and over $31,000 when you account for dividends.
Anyone aiming for a million-dollar retirement should lean into dividend stocks and enroll in their investing platform's dividend reinvestment plan (DRIP). When you enroll in a DRIP, your broker takes any dividends you're paid and automatically buys more shares of the stock that paid it. DRIPs can have a great impact on the compounding effect.
Instead of taking relatively small dividend cash payouts quarterly leading up to retirement, investors can benefit from reinvesting dividends until retirement and then taking the payouts as cash after they've built up a solid amount of shares.
A $1 million stock portfolio with a 2.5% dividend yield would net retirees $25,000 in annual income. Couple that with retirement accounts and Social Security, and it should help provide retirees with the financial security they need to live with peace of mind in retirement.
