Besides lucky lottery winners and clever stock strategists, becoming a millionaire overnight is nearly impossible. But reaching millionaire status over decades and retiring with a tidy nest egg?
Thanks to compounding interest, it's not an idle fantasy. The earlier you start investing, the easier it is to turn your upfront investment into $1 million.
Keep reading to see how much you should invest (and for how long) planning for retirement.
Now Available: The Definitive Guide to Retirement Income
Many successful investors eventually reach the same moment. The saving is done, the portfolio is built, and the question quietly changes from how much can I grow this to how much can I take out? Get that second question wrong and decades of good investing can come apart in a handful of years.
That is exactly what The Definitive Guide to Retirement Income helps answer.1 <p class="">Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. Guides are provided by Fisher Investments. The publisher may be compensated when readers request a guide.</p> It covers what your retirement could actually cost, which income sources are worth using, and the withdrawal math that decides whether the money lasts. It is free today from Fisher Investments. Read More Here ›
Investing $5,000 but nothing else at 10% for 25 years
To understand how much work it takes to turn $5,000 into $1 million, we'll start by looking at how much an initial investment at the average rate of return can net you.
Let's say you make an upfront investment of $5,000 with no additional monthly contributions. There's no way to know exactly how much you'll earn on an investment, but the S&P; 500 has an average annual return of 10%, so let's assume that's what you'll make.
If your interest compounds annually, you'll end up with around $54,173.53 after 25 years. That's far, far lower than your $1 million goal, and it doesn't account for how 25 years of inflation will drastically lower your buying power.
In other words, you'll need to do more than make a one-time $5,000 investment to boost your bank account to $1 million.
Investing $5,000 but nothing else at 20% for 25 years
What if you invest the same amount of money for the same amount of time but at double the average rate of return?
You'll end up with $476,981.08, which puts you much closer to millionaire status than investing $5,000 at 10%, but it still leaves you at just 50% of your goal.
Plus, stocks with an annual return of 20% are few and far between. You might be lucky enough to invest in a high-performing company that maintains a rate of return double the average over 25 years, but you shouldn't count on it.
Besides, even a high-yield investment leaves you with earnings below $500,000 once your investment term is up. Without additional monthly investments, your chances of earning $1 million on your initial $5,000 are slim to none.
Investing $5,000 plus $800 monthly at 10% for 25 years
Everything changes once you start making additional monthly deposits on top of your principal investment of $5,000.
If we add $800 a month to your upfront investment, assume an average return of 10% a year, and compound the interest annually, you'll end up with $998,305.30.
That's still a couple thousand away from an even $1 million, but close enough to still call yourself a millionaire, and substantially better than what you'd earn without those additional monthly deposits.
Released: The Definitive Guide to Retirement Income (Sponsor)
Most people spend their entire working lives focusing on one thing: growing a pile of money. Then they retire and discover the skill they actually need is close to the opposite. Turning that pile into steady income, year after year, through good markets and bad, without ever running out. It may be the least discussed and most consequential transition in personal finance, and plenty of otherwise careful investors walk into it with no real plan.
That is exactly what The Definitive Guide to Retirement Income helps answer.1 <p class="">Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. Guides are provided by Fisher Investments. The publisher may be compensated when readers request a guide.</p> It is a free guide from Fisher Investments covering what your retirement will really cost, where the cash flow should come from, and how much you can safely withdraw each year. Learn More Here ›
Investing $5,000 plus $1,500 monthly at 10% for 20 years
The more money you can invest every month, the higher your overall return will be — and the less time it will take you to pass the $1 million mark.
For instance, if you nearly double your monthly contribution from $800 to $1,500 and lower your investment time from 25 to 20 years, you'll have $1,064,587.49 at the end of your two decades.
Investing $5,000 plus $2,600 monthly at 10% for 15 years
Is two decades too long to wait for $1 million? Up your additional monthly contribution to $2,600. With the same average return, you'll end up with $1,012,187.67 after just 15 years.
Investing $5,000 plus $1,100 monthly at 8% for 25 years
10% is the average annual return for the S&P; 500 over the long run, but if the last few years have shown us anything, the economy is notoriously hard to predict or control.
To err on the side of safety, let's see what happens when we lower your estimated interest rate to 8%.
Investing $5,000 upfront and another $1,100 once a month, every month for the next 25 years at 8%, you'll end up with $999,240.78, just close enough to call yourself a millionaire.
Investing $5,000 plus $1,800 monthly at 8% for 20 years
Upping your monthly investments from $1,100 to $1,800 gets you closer to $1 million in five fewer years. Even at the below-average rate of 8%, you'll end up with $1,011,763.21 after 20 years.
Investing $5,000 plus $3,025 monthly at 8% for 15 years
By this point, you know the best way to retire with $1 million is to make ongoing monthly investments — the higher, the better.
If you can put away just over $3,000 a month on top of your $5,000 lump sum investment, you'll have $1,001,482.58 in just 15 years.
Investing $5,000 plus $5,175 monthly at 10% for 10 years
Want to make yourself into a millionaire as rapidly as possible? A decade isn't exactly overnight, but investing more than your principal each month at an average annual return of 10% will get you to $1,002,682.78 in just 10 years.
Of course, few Americans have an extra $5,000 a month just waiting for an investment opportunity to show up.
But if you're serious about earning your first $1 million, investing income from a second job or side gig plus the money you save through a strict budgeting regimen is the best way to get there.
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Bottom line
Turning $5,000 into $1 million takes time, discipline, and additional funding. Depending on your average rate of return and how many years you can afford to wait, earning $1 million through investing is far from a one-and-done job.
However, with solid financial planning, budgeting, and plenty of guidance from a trusted financial planner or retirement advisor, you can build wealth while you sleep to $1 million or more.
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