Are you hoping to retire with a million dollars? That might be a bit more or less than you really need to retire with, but for many people, it’s a solid goal. If you use the flawed-but-still-helpful 4% rule, you’d be able to withdraw $40,000 from your portfolio in your first year of retirement, adjusting future withdrawals for inflation.
Add to that the recent average Social Security benefit of around $22,000 per year, and you’re getting close to the kind of income many people can survive on in their non-working years.
Of course, more is better, and amassing more may be very possible for you, too. Here are four ways you might be able to grow $100,000 into $1 million.
Know the math
Starting out with $100,000 will be a big help. Here’s how you might amass a million dollars starting from zero:
It will take you around 34 years or 26 years, respectively, if you’re investing $6,000 or $12,000 annually. But if you start with $100,000, here’s how the numbers change:
That’s quite a difference, right? Clearly, starting with $100,000 gives you a powerful head start. Still, much can be achieved even if you start with zero. (Most of us start with zero at some point, after all.)
Now let’s look at how you might get from that $100,000 to $1 million. We’ll quickly review four approaches.
1. Risky approaches
First off are some approaches that many people favor — because they seem like they can get you to a million dollars much faster than other ways. They’re generally quite risky, though, and they may hurt your chances of amassing a million dollars more than helping. These approaches include:
- Lottery tickets: The odds of winning the Powerball jackpot were recently about 1-in-292,200,000.
- Penny stocks: They’re often tied to small, unprofitable companies and can be easily manipulated by malefactors.
- Day trading: If you’re buying and selling stocks frequently throughout the day, you’re day trading, and most day traders lose money.
- Using margin: When you buy stocks “on margin,” you’re doing so with money borrowed from your broker — and it isn’t free, especially with rising interest rates.
- Hot stock tips: Many hot stock tips are tied to stocks that have soared into overvalued territory, from where they may be more likely to retract than advance.
2. Slow and steady — with the S&P 500
It can be intimidating to think of jumping into the stock market, which encompasses thousands of companies and their stocks. You can make it very easy on yourself and do very well, though — by investing in one or more great index funds.
An index fund tracks a particular index (such as the S&P 500 index of 500 leading American companies), aiming to deliver its return (less fees, which are often minuscule). Here are two low-fee S&P 500 index funds, plus two even broader index funds:
- iShares Core S&P 500 ETF (NYSEMKT: IVV)
- SPDR S&P 500 ETF (NYSEMKT: SPY)
- Vanguard Total Stock Market ETF (NYSEMKT: VTI)
- Vanguard Total World Stock ETF (NYSEMKT: VT)
You may find these funds or funds like them in your 401(k) investment menu. Note, too, that the stock market has a long-term average annual growth rate of roughly 10%, so the tables up top, reflecting 8% average annual growth, are not unreasonable examples of what might be achieved with broad-market index funds.
3. Growth stocks
If you want to aim for a faster growth rate for your portfolio, you might add some growth stocks to your mix. Growth stocks are tied to companies that are growing at a faster-than-average rate.
You’ll find lots of companies among them that have delivered or will deliver phenomenal returns, but plenty will flame out, too. That’s why it’s smart to spread your dollars across a bunch of them. Our Foolish investing philosophy suggests buying into around 25 or more companies and aiming to hang on to your shares for at least five years.
4. Dividend stocks
Finally, consider including some dividend-paying stocks in your mix, as well. Healthy and growing dividend payers will tend to keep delivering regular infusions of cash into your account no matter what the economy is doing — and they tend to increase their payouts over time, too — often outpacing inflation.
These are four ways to consider as you aim to amass a lot of wealth for retirement. The first, risky, way, should be avoided. The last two, growth and dividend stocks, can serve you well, but you can do quite well indeed simply parking your money in index funds for decades. Learn more, think it over, and see which approach(es) seems best for you.
— Selena Maranjian
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Source: The Motley Fool