How to earn $1 million

[Sassy]

The One-Year $1 Million Challenge
by Chuck Saletta
Tuesday, April 8, 2008
provided by The Motley Fool

It's true what they say: Youth is wasted on the young.

I'm not going to get all sentimental about how responsibilities are nil and possibilities are endless. No, the real waste is the time young folks have to compound their money.

The One-Year $1 Million Challenge

At a certain age, if you:
• Max out your 401(k) contributions for one year,
• Max out your IRA for that same year, and
• Merely meet the market's historical 10% annual returns
... you'll wind up a millionaire by the time you hit retirement.

That age? Twenty-six. In 41 years of compounding at 10% annually, $20,500 ($15,500 in a 401(k) and $5,000 in an IRA) will turn into $1 million. And you'll never have to contribute another dime. Of course, inflation between now and then means that $1 million won't buy nearly as much four decades in the future as it does today. Still, it's a remarkable feat of compounding.

In fact, that's how you win the $1 million one-year challenge: You make time your biggest ally in amassing phenomenal sums of wealth.

You See the Absurdity Here, Right?

In order for most 26-year-olds to save $20,500 in a single year, they'd either need to find a fabulously high-paying job or a rent-free room in their parents' basement. Either way, they'd probably be living on a strict diet of ramen noodles.

It's a stretch goal for people just starting out in life, to say the least.

But here's some good news for those of us who long ago celebrated a 26th birthday: The power of compounding doesn't care whether you invest it all at once, or only save a bit at a time.

It's most important to simply sock away as much as you can, as quickly as you can, and let it compound for as long as possible.

If You're Past 26 ...

While time is the ally of the young investor, we more mature folks haven't been entirely left out to dry. In fact, even if you're around 50 and haven't yet saved a dime for your retirement, it's still possible for you to retire with $1 million at the reasonable age of 67.

This table shows how much more effort it takes to become a millionaire when you wait longer to start saving:

Starting Age / First Year's Contribution Grows to ... / Consecutive Contribution Years to Reach $1 Million
26 $1,020,596 1
32 $576,100 2
36 $393,484 3
39 $295,630 4
41 $244,323 5
42 $222,111 6
44 $183,563 7
45 $166,876 8
47 $137,914 9
48 $125,376 10
49 $113,978 11
50 $133,943 12
51 $121,767 15
52 $110,697 DNF*

These calculations assume you max out your contributions every year -- including catch-ups for ages 50 and up. Does not include any employer contributions. *DNF: Does not finish with $1 million or more by age 67.

The older you get, the clearer the picture becomes: You cannot retire a millionaire from one year's savings. You'll need to be disciplined and consistent about saving, taxes, and investing.

You Can Still Get There

If you can save the cash and have the time to let compounding work, you can reach these returns. Every number in this article assumes you simply match the stock market's 10% historical annualized returns. There's no guarantee of that happening, of course. But if history is a worthy guide for the future, an easy way to match those returns is with an S&P 500-tracking index mutual fund.

The Vanguard 500 Index (VFINX), Fidelity Spartan 500 (FSMKX), or SPDRs (SPY) exchange-traded fund are three vehicles that have low costs and broad diversification.

Use Everything You've Got

Of course, the toughest part of this plan is coming up with the $20,500 per year ($26,500 if you're 50 or older) it takes to max out both your 401(k) and an IRA. It's quite a sacrifice, but fortunately, you don't have to make it on your own. Depending on your specific circumstances and the plans you have available, you'll get some combination of:

• Tax-deductible contributions,
• Tax-deferred (or potentially tax-free) growth, and/or
• Employer-matching funds
... to significantly soften the blow to your pocketbook.

Fool contributor Chuck Saletta wishes the IRA and 401(k) limits were at their current height when he was in his 20s. At the time of publication, Chuck owned shares of General Electric and Intel. Intel is a Motley Fool Inside Value pick. UPS and US Bancorp are Income Investor picks. Time Warner is a Stock Advisor selection. The Motley Fool owns shares of SPDRs and has a strict disclosure policy.

Copyrighted, The Motley Fool. All rights reserved.

**broken link removed**

 

[Uluwatu]

The biggest problem with this plan is that most people don't have $20,000 to $26,000 a year to sock away in 401K and IRA accounts. I would say in order to do that you would have to be making about $150,000 a year or maybe more. I think the gentleman who wrote the article should have used more realistic numbers if he really wanted to help people.

But on a more positive note, the best thing any one can do is put money away in an IRA or Roth IRA. No matter what it makes it is better than nothing.

Thanks Sassy for the article, I just don't think the numbers portrayed are realistic for most people. But the idea is a good one.

 

[pesty4077]

Good article Sassy, Not everything is in black and white. I have 2 busineses, that took well over $100,000 to start(no help from the gov. on small business) I got my Gross sales up to 1,000,000 the second year. Sounds good, doesn't it. However, due to the current economy, I have lost a excessive amount of money. I am still positive that I will eventually surpass record sales. But, it takes money to make money. Maybe the politicians will take their heads out of their asses and actually do something for the economy. I am sorry, I am was justing venting for a moment.

 

[Sassy]

I thought it was an interesting article.

I started my first IRA at 24 years old, and I can tell you that I'm no where near this. My theory is every little bit you can put away help. It's just impossible to put away that much money when you are young and just starting out. Even when you are older, there are just times when money gets tight and you have no extra to put aside.

Pesty, we can relate. Everlast is going through the same thing with his business. Last year was a great year for him, but by time you take out all the increased expenses and taxes... it doesn't looks so good. This year is just so slow that it's killing him. We keep hoping things will pick up.

 

[dragonfire101]

I started an IRA at around 25, 5yrs ago and put 2,000 in it right off that bat and then added a $150 month. Now I have the same 2,000 left in it because it has been going down $500 a month the past 6 months with the economy. Compounding my ass. A few other coworkers are loosing tons in their IRA's.

 

[loganb_football]

I started an IRA at around 25, 5yrs ago and put 2,000 in it right off that bat and then added a $150 month. Now I have the same 2,000 left in it because it has been going down $500 a month the past 6 months with the economy. Compounding my ass. A few other coworkers are loosing tons in their IRA's.

Wonder how that is possible? Ive looked at some of the charts and there is a steady rise.

 

[irish_sd]

I started an IRA at around 25, 5yrs ago and put 2,000 in it right off that bat and then added a $150 month. Now I have the same 2,000 left in it because it has been going down $500 a month the past 6 months with the economy. Compounding my ass. A few other coworkers are loosing tons in their IRA's.

Bottom line with stocks and stock mutual funds is time. I understand it is frustrating to see your investment lose value. But lets face it, all of us would have loved to put money into the stock market 20 or 30 years ago, not touched it, and have it still today. Can you imagine if you would have bought stocks of large companies in 1977 or 1987 and still had them. You would be rich! Very rich. Now nobody knows what the future holds, but if you would have invested in large stocks and given it 10 years to grow. 100% of the time you would have made money, and most of the time a SUBSTANTIAL amount of money. Sock it away and look at it when your 60 years old. You will be rich!

 

[Sassy]

Started investing in the stock market in 1987. My investments have gone through the corrections too. On paper I've gone through some major losses, but I just left them alone and eventually its goes back up. I've recouped the losses. Except for the technology crash. My ex invest some of our money in it, and we were getting divorced when it crash. We had to split our investments. Some how I got the wrong end of that deal. I didn't see a dime of it.

I think the main thing is when the market is down, don't sell off any thing if you don't have too. It's better if you wait until it comes back up.

Hang in there... it will come back up again.

 

[unnatural1]

Dad, any recommendations for books or web sites?

 

[Curiousity]

Good post Dad.

I find it hard myself because I don't fully understand the market. I don't have the time or desire to become an expert in it either as I am using that time to learn other skills. One of my past girlfriends was a financial adviser (with her series 7 and more passed) and she always recommended spreading out your investments and therefore, your risk.

Basically, I put 4% into my 401k because that is the company match. You can't beat free money. That's all I will ever put into a 401k. This is because I don't make enough to enjoy a good tax benefit and the investment choices are severely limited. Also, I would like to use anything more for other investments.

I am maxing out my Roth IRA contribution now. I started this about 8 months ago with Fidelity (went with Fidelity because this is who my company goes through for 401k, etc - so it becomes one stop shopping.) Since I'm tentative about the US dollar, I researched foreign mutual funds. I found five that focus on different regions/countries (no load too) that I will purchase as my cash reserves meet the initial purchase price to buy in. Since the initial purchase price is $2500, it will be ~2 more years before I have money in all five funds. I choose to do it this way for two reasons. 1) I want to focus on mutual funds because it spreads out the risk and I can't imagine the research needed to purchase individual stock in an intelligent fashion. 2) It spreads my risk out across the world market.

And lastly, I am saving any additional money for other investments. It isn't much, but I can add the GI Bill to that as I am going to school right now. I understand that I am building school loan debt to build my savings, but it is purposeful. Within 2-3 years, I'll move up in my company to a higher paying job. At that time, I will begin searching for a 3- or 4-unit building to purchase with my VA Loan as I am a veteran. The saved up GI Bill money will be and remain the emergency fund in case I need to do repairs on the building, etc and will bring great peace of mind. Real estate would be just another spreading of my investments.

Even then, I think I still fit into that category of "waiting it through". I just try to acknowledge and balance out that way of thinking with spreading out the risk.

 

[Curiousity]

Thanks. I'll look into that material and find some time to add it in.

Diversification is, of course, one approach, but markets are actually more risky than most models acknowledge, so this is not always going to work as well as we might hope.

Interestingly, the research necessary to buy ANY type of freely-trade market is the same - an accurate appraisal of the supply/demand picture for whatever vehicle yuo're trading over the timeframe yuo want to trade it. My post about reading resources might be a good place to start - if yuo read and understand the majority of that material (and it's NOT rocket science), then yuo'll have a better understanding than the vast majority of the way markets work.

As to the Series 7, this is largely an SEC compliance exam that will be of little to no help in actually making investment decisions. It wasn't in 1986 when I got licensed and it isn't now, over 20 years later. It WILL keep yuo abreast of current SEC compliance, especially as it relates to handling customer accounts as a registered rep - and, no, I do not handle anyone else's funds, 1986-1988 was enough, LOL!

 

[Sassy]

Dad... no offense taken, because you are right. I was being WAY to general. I'm sorry to hear about what happened to your parents. Unfortunately a lot of so called "advisers" are only interested in their own pockets and not what's best for their clients.

I am with Curiousity... it very hard for the average person to keep up with all the markets and what's going on with the economy. It seems like you can't fully trust the professional advisers either. I guess what I'm getting to is how does a small investor make the most of their investments?

I'm very fortunate because several members of my family are financial advisors, and I can trust their advise a little more than some one who I don't know very well. I even say this with some caution, because I've seen family members steal from their own family. I know this happens.

 

[Sassy]

On a closing note, let me give yuo a little test for advisors:
Ask them if they take or trade their own advice. In other words, do they do what they're telling YUO to do?

They'll claim every investor is different - different goals, different risk tolerances, different life stages, blah, blah, blah, so this isn't a fair question. Bullshit! How have THEIR portfolios done? Do they trade the market or just sell it to others?

I like that.... that is good.

As for the family... they were not related to me. It was a former employer of mine. He bought a print shop that wasn't doing very well. He turned it around and it start becoming profitable. He had two cousins who owned a sample business that made carpet samples for the carpet mills. They talked him into merging his business with theirs. It was a very good concept that a lot of printing companies do in this town. Only they sucked all the cash out of his business. A year later they all went belly up... leaving him with a bunch of debt for some loans that he took out when they merged. He lost everything including his printing press and other equipment. He had to start over in his garage with his wife putting everything in her name.

I'll have to get the books you suggested. Thanks.

 

[unnatural1]

Dad, thanks for the book list. I have already read "Reminisences of a Stock Operator" by Edwin LeVevre, that's great read. I'll get started on the rest. Thanks again.

 

[Pekkerwood]

I used to operate and currently am a partner in a small hedge fund trading index futures. I am not involved on a day to day basis any longer. I regularly would field calls from brokers touting a stock or their advice. I always ask them to send me a printout of their personal account for the last year. That is usually the last call I get.

I actually opened a brokerage account as sort of a favor to a friend at a big firm. I was shut down after a year and my money returned because of my trading style. All in , All out, usually in the same day. So after begging for an account they don't even want it when I give to them.

Pekkerwood

 

[mung]

My take has always been those books are more to illustrate theory. As mentioned, in order for a 26 year old to invest that amount of money each year, the income would not qualify for an IRA. But, the theory is still applicable in theory only, as current laws prohibit some of what they discuss. And the amount one can contribute at 26 years of age intoa 401(k) or SEP, would not be significant enough to meet the appropriate investment. The levels are rediculous. Hence, there will always be a demand for real estate investments/investors. I just closed on another commercial building and will continue down this path as long as the right opportunity presents itself.

I happen be fortunate enough to have a friend that used to work for me, who went on to college, became a pharmacist and has since left that field and does nothing but day trade. Some all-in, all-out within the same day, some longer term investments. He is doing quite well with our money and he is very conservative, and most of all I trust him to the end of the earth. We started buying gold a several years ago before the interest rates began to fall prior to 2000 at $138 an ounce, it has since dipped back under $1,000 an ounce to the mid $800's. If I could have sunk more money then, I would be typing this post from my yacht, sipping a foofoo drink in the sun.

Down markets are like a sale on wall street, it is just a matter of knowing what to buy and exactly when you need that money to get out. I've got another 25 years or more, so todays market means nothing more than buying the right stock...cheap.

 

[Sassy]

Dilbert's Steps to Investing

Dilbert's boss: I got a great investment tip from my dentist. You use stock options to hedge commodity losses and then cross-collateralize the whole thing with zero coupon bonds.

Dilbert: Does that mean anything?

Dilbert's boss How would I know? I'm not a dentist.