According to research by The Motley Fool, the average U.S. household has $87,000 saved for retirement. Suppose you want to retire with a million-dollar nest egg. Round that average to $100,000, and you need to grow your savings tenfold between now and retirement.
That can seem intimidating, especially with how hard it feels to get that first $100,000. So consider investing to grow your savings. Compounding will make the next $100,000 feel more manageable, and it gets even better from then on.
Check out these four ways to help your nest egg reach its full potential. You might be surprised how easily you can grow it to a million dollars by retirement.
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1. Invest in the S&P 500
The primary tool you'll use to multiply your money is the S&P 500. It's the most common stand-in for the U.S. stock market. It's an index of 500 of the biggest and best U.S. corporations. It's also a stunningly effective wealth-building machine. It may zig-zag sometimes, but the index produces an average annual return between 9% and 10% over time.
That means your initial $100,000 could double roughly every seven or eight years. Are you 40 or under? You won't have to do too much additional work if the market gives you historical returns for the next 24 years! The best way to utilize the S&P 500 is to invest in an exchange-traded fund (ETF) that tracks it, like Vanguard's S&P 500 ETF.
2. Add new funds
You might already have good savings habits if you've put together $100,000 into retirement savings. Even still, everyone should consider steadily adding new funds. The more you add, the faster you'll reach that million-dollar goal. Suppose you average 9% annualized returns over time. Your initial $100,000 savings will grow to $1 million after 26 years.
But adding funds each month along the way will shave time off your journey. And the more you add, the faster it goes:
| Monthly Funds Added | Years to $1 Million |
|---|---|
| $100 | 25 |
| $250 | 23 |
| $500 | 21 |
| $1,000 | 18 |
| $2,500 | 13 |
The author made the chart.
Investing is ultimately a numbers game. You can adjust your monthly contributions to your income and time horizon to make a plan that works for you.
3. Don't obsess over day-to-day movements
Retirement investing is the ultimate long-term journey, but it can still be tempting to check your investment balances too often for your own good. You don't need to leave it alone for years at a time, but checking your account daily and weekly can tug at your impulses. Is the market going through a rough stretch? Staring at your account might tempt you to withdraw your money, only to miss the eventual rebound.
When it comes to investing, our gut feelings are not our friends. You need to invest with your brain, not your heart, and remember that these investments are for years, possibly decades from now. The economy will likely grow a lot by then, and your investment accounts will reflect that. Building wealth never happens in a straight line.
4. Look for free money
Most people will have at least some of their retirement savings in an employer-sponsored retirement plan, like a 401(k). Retirement plans can be great because they often come with tax benefits. For example, a 401(k) defers the taxes on your funds until you withdraw them in retirement, and your annual contributions lower your tax bill for the years you make them.
Most importantly, some plans offer matches and incentives to get you to participate. A 401(k) company match is an employer's additional contribution up to a percentage of your salary. For example, if your plan matches dollar-for-dollar up to five percent, contributing $5,000 on a $100,000 salary will be matched by another $5,000 by your employer. That's $10,000 total, or double your out-of-pocket contribution out the gate. You usually need to contribute first to get the match, so don't pass up this easy money if it's available to you!
Here's the bottom line
Personal finance can be complicated, but there are features throughout the system designed to give you advantages. Don't hesitate to consult a professional if needed, but the important thing is that you take action.
A long-term, diverse investment strategy will work wonders for your retirement savings, growing your wealth to an extent you may not have known possible.
