Got $100,000 saved up? If so, congratulations! You're doing great. But, let's face it -- that's not going to fund the kind retirement you're likely envisioning for yourself. You'll probably need something closer to $1 million (10 times your current stash) to achieve the financial freedom you want to enjoy in your golden years.
So how do you turn $100,000 now into $1 million by then? You invest it, of course.
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Even so, you've got a wide range of investing options, each of which will yield different rates of returns, and therefore, each of which will require a different amount of time to reach the seven-figure mark.
With that as the backdrop, here's a rundown of four of the most basic investing-growth scenarios for turning $100,000 into $1 million for retirement, assuming any gains, dividends, or interest payments collected along the way are reinvested in the same instrument paying them.
1. Earn 0.5% per year on this money for 461 years
Our first hypothetical is so pointless that it's laughable -- nobody's got 461 years. But, this math is made much less funny by the fact that 0.5% is about what the average bank-offered savings account is paying right now.
Yet, too many people are storing too much of their saving in these types of vehicles. While it's often only intended to be a temporary parking place before putting this money to work in a more fruitful way, it's easy to let the weeks turn into years with this cash, allowing higher-growth opportunities to pass you by.
2. Earn 4.9% per year on this money for 48 years
Here's a more realistic scenario for anyone willing and able to take at least a little action yet unwilling to take on any serious risk. This presumed rate of return? That's the current interest rate on 20-year Treasury bonds issued by the U.S. Treasury, which of course is backed by the full faith and credit of the U.S. government...not to mention the federal government's money-issuing mint. Even if the worst-case economic scenario is realized, the U.S. government can simply print the money it owes you.
Do note that this interest rate changes over time -- and sometimes dramatically. For perspective, interest rates on long-term government debt have been as high as 15% (back in the early 1980s) and less than 2% (in 2020), although these are two extreme instances. You'll most likely achieve returns in the ballpark of 3% to 7% on this super-safe investment.
Bear in mind that any of these rates of return barely beat inflation. A million dollars 48 years from now will only have about a quarter of the buying power that it does today. You'll also need to reinvest any interest payments made in the interim in more Treasuries paying similar interest rates, which can be a bit of a pain. This means an ETF could be the easiest way to own government-issued bonds.
(Side note: Some online banks' high-yield savings accounts are paying similar interest rates right now, although these rates tend to ebb and flow a bit.)
3. Earn 5.5% per year on this money for 43 years
This rate of return wasn't simply pulled out of a hat. This is the typical interest yield on high-quality corporate-issued debt; you know them better as corporate bonds.
The difference between these interest rates and government-issued debt is surprisingly small, reflecting the minimal amount of additional risk you're likely taking on by making loans to what are to the world's most financially stable corporations. If you're willing to take on a little more risk, however, you can buy bonds issued by wobblier companies and earn on the order of 7% per year, shortening your growth timeframe to 34 years. That's considerably more risk for not a whole lot more reward though.
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As was the case with government-issued debt, you'll also need to find a means of reinvesting any interest payments made along the way in more corporate bonds at a comparable rate of return. And, as is also the case with U.S. Treasuries, the rate of return on this corporate debt barely outpaces inflation.
4. Earn 10% per year on this money for 24 years
Last but not least, achieving an average annual rate of return of 10% will grow $100,000 into $1 million in about 24 years.
We're talking about stocks, of course, and presuming any dividends collected along the way are reinvested in more of whatever equity holdings you may choose. In this vein, your smartest and easiest bet is a stake in an S&P 500 index fund that simply mirrors the broad market's performance. Often times the effort to "beat the market" will (ironically) cause you to underperform it.
Also, bear in mind that while this 10% figure is a reliable long-term average, it's an average based on a wide array of yearly inputs. Some years, the market does better. Other years it does worse. In some years, it even loses ground. That's the trade-off, although the volatility is worth it in the long run...if you've got a long time to let it grow. If your retirement date is within sight, you don't have enough time to own an all-stock portfolio.
Use a hybrid approach, and adapt as needed
Things aren't this cut-and-dried for any investor, to be clear. Most people will want to use a combination of at least two or three of the scenarios above, dialing back their total risk as time marches on. Investors will also want to adapt their allocation over time, since interest rates change, as do returns on different kinds of stocks. As an example, higher interest rates often lead to higher dividend yields from stocks that pay them, or sometimes regulatory or technological changes create new opportunities. Being flexible is important.
The chief purpose and point of the exercise above, however, is to illustrate that there's really no way to meaningfully and reliably grow your money outside of the stock market. Even if you're doing relatively well with corporate bonds and U.S. Treasuries, you're still not making much net progress after factoring in the impact of inflation.
Your proverbial marching orders, therefore, are to find a way to invest as much in the stock market as your risk-tolerance will allow, and also find a way to maximize your returns while minimizing your risk with stocks. Again, a simple index fund will at least be most people's best starting point.
