Here's an Easy Path to $1 Million
Filed under: Investing, Saving
By Chuck SalettaMotley Fool
One million dollars may not be enough to buy you a spot on Lifestyles of the Rich and Famous, but it's still a life-changing amount of money. With $1 million, a paid-off home, no other debts, independent children, and reasonably good health, it's possible to live a long, reasonably comfortable retirement in most parts of the country.
For most of us, however, that $1 million seems like a very tough target to reach. With median household incomes around $50,000 per year, hitting that magic million-dollar target would require socking away some 20 years' worth of that typical income.
On its surface, that seems preposterous, especially after taking taxes and the basic costs of living and raising a family into consideration.
Yet as crazy as that $1 million target may seem, it's actually possible to reach for nearly anyone with steady work and the discipline to consistently sock away a little bit every month.
Here's How
If you've got access to an employer-sponsored retirement plan, the discipline to reach a million dollars in savings is just a few signup forms away.
Sign up for automatic paycheck deductions. Add to that automatic investment both the immediate tax deduction from contributing to a traditional RRSP plan -- and potential for an employer match -- and that path to $1 million gets even easier.
When you also include a healthy dose of time to save and potential returns you can get on your investment, becoming that future millionaire becomes downright achievable.
Indeed, if you start early enough and earn strong enough returns, you may be able to get away with needing to save only a small fraction of that $1 million. Time -- and rate of return -- will take care of the rest.
As the table below shows, there's a very clear trade-off between the rate of return you earn, the amount you can put away each month, and the time it takes to reach that $1 million mark:
Source: Author's calculations.
All of those "monthly savings" amounts are reachable within a typical 401(k). That $1,416 monthly amount works out to about $17,000 per year, the 2012 contribution limit for those under 50. While it's true that those able to sock the most away generally hit that $1 million mark the soonest, check out the numbers near the top of the table.
If you start early enough and sustain a strong enough return, you can reach that $1 million mark within an ordinary lifetime of working , even by saving a mere $100 a month -- or about 2.4% of that $50,000 income. That's less than $4 a day, which should be well within the realm of possibility for most people who are truly dedicated to improving their futures.
Use "Other People's Money"
Even better, it's likely that you won't even have to come up with that $100 a month all on your own. Indeed, it could potentially cost you about half as much. Effectively, you'd be instantly doubling your investment if you're in the 25% tax bracket and benefit from a 50% employer match.
The table below shows how $100 can be added to your account while it would only cost you $50 in spending money:
Contribution Amount $66.67
Employer Match (@50%) $33.33
Total Added to Account $100.00
Tax Savings (25% bracket) $16.67
Out-of-Pocket Cost: $50.00
(Source: Author's calculations.)
That less-than-$4-a-day cost to hit that $100-a-month target just became less than $2 a day in foregone spending, to get you from $0 to millionaire status within a typical working lifetime.
And when you consider that the money can come straight out of your paycheck so that you'll never miss it -- it becomes pretty obvious that there's really no easier way to reach $1 million.
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Can the author share with us how and where (any sources) to achieve that 4% to that 10% "Annual Rate Return" now?
August 26 2012 at 8:42 PM Report abuse Permalink rate up rate down ReplyI am a 56 yr. old man and I live in Ontario Canada. I have Not yet received a tax return for the past 20 years which would total $10,730. I would usually get an amount of $342.50 in my tax return and a total of $194. in GST credits/rebates. The total amount when combined would be $536.50 times 20 years, which will equal a total of $10,730.00 When I called Revenue Canada to ask why I was not receiving tax forms in the mail like everyone else, I was told by the accountant on the other end of the phone that "Mr Glover, you are dead" Do they really expect me to listen to their garble in regards to me being "dead" when they are talking to a live soul on the other end of the phone? Are there workers at Revenue Canada that have made a huge mistake and declared me dead so that they can collect my tax return and put it in their pocket? Hmmm I have to wonder about what goes on in those offices. When I asked them a tax return form so that I could file a tax return while sitting at the table, like anyone else does who knows how to file their own. I was told that in order for me to receive them and be put back on their mailing list, I would have to file tax returns for the next two years in a row from home or by someone else who prepares these so called tax returns.
Now mind you there was a man who was in the Canadian Forces that lived just up the street from where I am located with the same name as me (and of no relation to me) that did pass away several years ago. We would have different middle names and different social insurance numbers as well as different addresses and income levels. His marital status would indicate that he had a wife and a son whereas, I am single with no children and born at a later time than he was as I am younger than him. I am a reasonable person to get along with but I was made aware that I am going to require these overlooked tax returns from the years gone by when I need to apply for my o.a.s. and c.p.p. when that time falls upon me. What do you think about this situation? Moreover, what does your reading public think of this? Has anything like this ever happened to any of them? To what extent should we trust this and past governments with our finances? Let's find out - Shall we?
PS: Let's not forget accumulated interest owed to me on that $10,730.00 and that doesn't include any special incentives for heating rebates and up to the $3,000.00 expenses for updating your home in the years gone by.
Respectfully yours,
John Glover
613 392-4444 (phone number is not for publication but for you only)
you can't accumulate much saving when The Fed is holding interest rates down artificially. it basically is a disincentive to save. thanks federal government.
August 25 2012 at 9:50 AM Report abuse Permalink rate up rate down ReplyThe table above showing how to reach one million dollars sounds good in theory.
The trick is accumulating the monthly savings. Most people either rent an apartment or a house or they buy a house or a condo and have to pay a mortgage.
Then if you own a car, you have to pay for car insurance, gas repairs etc.
You also have to have home insurance. Most people have credit card debt. If you have older children, you will need to save money so they can go to college or university. You have to spend money on food, clothing, medicine and the list
goes on. Even if you do have a good paying job, by the time you have paid all
these things, where do you get the extra money to put away every month so
this money can gain interest and you can become a millionaire. Yah, right.
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