Most people would love to have $1 million. That figure is often what advisors recommend shooting for if you want to enjoy a long, comfortable retirement.
Yet aiming for the $1 million market could be a mistake. Of course, becoming a millionaire isn’t an issue, but there are factors working against you when aiming for lofty goals. Psychological research has consistently shown that long-term planning can reduce your financial success if it’s not executed properly.
For example, if you’re 30 years old and have $50,000 in savings, how do you eventually reach $1 million? Focusing on the larger number prevents you from breaking your path into smaller, more actionable steps. Simply saying you’d like to become a millionaire isn’t helpful if you don’t understand the math to get there.
Additionally, lofty targets can make you focus more on investment returns than saving schedules. Regular saving is as powerful as high returns, yet having long-term goals doesn’t necessarily show you how to take advantage of this.
Here’s how to get to $1 million the smart way.
The smart way
How do you attain large sums of money without making that your goal? Start big, work backwards, and finish small.
When it comes to growing your money, only a few factors matter. The first is how much you already have saved. The second is how much you’d like to have.
The other factors tell you how you’ll bridge the gap. These include your rate of return, contribution schedule, and time horizon. Increasing any of these figures will help you bridge the gap faster.
Let’s begin with our earlier example: you’re 30 years old with a nest egg of $50,000. If you’d like to retire by age 60, your money will be invested for three decades. At an 8% annual rate of return (the long-term historical average), your initial sum would grow to $503,132.
To plug the gap, you’ll need to implement a regular contribution schedule. All you need to reach $1 million is to invest an additional $333 per month. To do the math with your own variables, simply look up a “future value calculator.” There are several viable options on the internet. They allow you to play with the variables listed above to see what your exact path should be to reach $1 million.
And there you have it. In this scenario, simply invest $333 every month and you’ll get to $1 million by the time you retire. That’s a much more manageable sum. After all, it’s much easier to sock away $333 each month than blindly try to reach $1 million.
Do your own math
No matter what your assumptions are, doing this math is critical. Seeing a savings gap of $950,000 is discouraging, which can lead to a lower savings rate. However, if you know exactly how much you need to be saving each month, you can execute short-term goals knowing you’re doing everything necessary to reach the $1 million mark.
After you run the math and understand what you need to be doing every month, simply fill your portfolio with wealth-generating stocks that can produce market-beating returns through age 50 and beyond. Once your allocation is set, all you need to do is keep saving every month and wait. It’s that easy.
