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Turning $1,000 Into $1,000,000
By JLP | November 16, 2007
I saw an interesting article on the Motley Fool this morning titled How to Turn $1,000 Into $1,000,000 (NOTE: I linked to the article but be warned that it is basically an advertisement for one of their subscription newsletters). The article got me to thinking about the rates of return that would be required to grow $1,000 to $1,000,000.
Of course the answer depends on how long you have to reach your goal. If your goal is to turn $1,000 into $1 million in one year, you have to get a 99,900% return. If you can wait two years, your required rate of return (ROR) drops to 3,062.28% per year. If your time horizon expands to a career of 40 years, your annual required ROR drops 18.85%, which is still very high considering the S&P 500 Index historically returned an average of about 10.4%. I put together a handy little graphic to show you the various required RORs to turn $1,000 into $1 million based on the number of years you have to reach your goal.
Now, what happens if you add $1,000 each year? As you can probably guess your required ROR drops. How much does it drop? Well, as the next graphic shows it drops pretty significantly the longer your time horizon (ah, the lovely power of compounding!).
.GIF)
Over a 40 year career, the required ROR to turn an initial investment of $1,000 into $1,000,000 by adding $1,000 per year is a much more manageable 12.17% (though this is still high when compared to the S&P 500 Index’s historical return). This just shows how important TIME is in the equation. The more TIME you have, the less you have to save in order to reach your goal.
Don’t Forget About Inflation
One thing that bugged me about the Fool article is this subheading for one of the sections:
Retire comfortably: $1 million in 45 years
I hate to be the one to ruin the party, but a $1 million retirement account 45 years from now is hardly what I would consider “comfortable.” Sure, $1 million has a nice ring to it but in 45 years it will only have the purchasing power of about $254,000 (assuming a 3% inflation rate over 45 years). Looking at it another way, a person would need $3.7 million in 45 years to equal the purchasing power of $1 million today. OUCH!
Bottom line: You’re gonna have to save more than $1,000!
Topics: Investing, Retirement Planning |
November 16th, 2007 at 11:21 am
The key is really to start saving and investing as early as possible. The magic of compound interest takes time to ramp up…but its effects are quite remarkable over time! I’ve been trying to tell people younger than me to start saving now but some people just don’t get it unfortunately….especially when I start getting into the numbers
-Raymond
November 16th, 2007 at 12:18 pm
What? I need to save more than $1000!!! That just blows a hole in my retirement plan
Guess I better get on the ball.
November 16th, 2007 at 12:40 pm
Especially with extended lives from all the scientific, people are going to need more than a million–$245,000.
November 16th, 2007 at 1:14 pm
Awesome, I love it when compound interest is illustrated like that. Once again it shows the importance of saving and investing regularly. Thanks
November 16th, 2007 at 5:04 pm
I’m sure you didn’t mean anyone to read into it like this, but you said “S&P 500 Index only returns an average of about 10.4%”. You certainly meant returnED. While it goes without saying that caveat emptor in all thing financial is that past performance is not guarantee, etc etc, I think there’s ample reason to believe we won’t have those kinds of gains going forward unless inflation increase. That’s not to say it won’t happen, but for planning reason, I think 4-5% real return is a good number (so 7-8% nominal).
Anyway, great post!
November 16th, 2007 at 5:47 pm
Great information! Can you publish your formula for these tables? I would love to know what’s going to happen if I put $2000– or $5000 per year into my retirement fund.
November 17th, 2007 at 10:17 am
Frank, check out this compound interest calculator from money chimp ( http://www.moneychimp.com/calculator/compound_interest_calculator.htm ) and also this retirement simulator from flexibleretirementplanner.com ( http://www.flexibleretirementplanner.com/ )
November 17th, 2007 at 11:44 am
[...] Turing $1,000 into $1,000,000. JLP explains how this feat of mathematics can be accomplished. Pay attention to his closing thoughts in this article. [...]
November 17th, 2007 at 11:51 pm
[...] JLP has tips on how to turn $1,000 into $1M. [...]
November 18th, 2007 at 8:00 am
[...] JLP at All Financial Matters does something that most personal finance bloggers don’t: he sits down with a spreadsheet from time-to-time and runs the numbers on various personal finance scenarios. This week he decided to take a look at the annual return on investment needed to turn $1,000 into $1,000,000. Stuff like this is academic, of course, but I still find it fun. [...]
November 18th, 2007 at 11:36 am
[...] All Financial Matters: Here’s a great discussion and visual on what it takes to turn $1,000 into $1,000,000. [...]
November 18th, 2007 at 4:35 pm
[...] JLP talked about turning $1,000 into $1,000,000. [...]
December 15th, 2007 at 5:18 pm
jlp,
awesome website,
i have been trying to figure out how you calculated this and am confused.
i have been using the rate function on excel and use a table with numbers up 50, and the function goes =rate(year reference from table,,-1000,1000000)
this works up to year three, then returns an error for years 4 through 44, then works for years 45 and on.
do you know what I am doing wrong?
thnx
James
February 20th, 2008 at 5:07 pm
Hello , Some great info on this site, IM 39 and just starting to realize I need to be saving I know a little late huh. I work union and at 55 I will have full benefits which is projected at about 3000-4000 a month.. i make about 50,000 a year.. please tell me how much I need to put away to retire.. I would like to retire at 55 if possible thanx