Save For One Year, Retire With $1MM

Most “retire with one million dollars” articles focus on slow and steady savings over the course of decades. That works of course, and saving regularly is a great habit to get in no matter how much money you have.

But if you’re young enough, with some concerted effort you can save for only ONE year, never save another dime, and still retire with a million dollars. This Motely Fool article explains.

It all comes down to the power of compounding. Let’s say you’re 26 years old, you start with $0, and somehow you manage to invest $20,500 that year (not so coincidentally the same amount it takes to max an IRA and a 401k in 2008). If you never save another dime after that, you can retire at 67 with over $1M if you can achieve annual returns of 10%.

As daunting as it sounds, coming up with $20,500 in one year is not impossible for many 26 year olds. Maybe you live at home after graduation and save most of your salary; maybe you receive a small inheritance; maybe you even have a high paying job and decide to just save half your salary and continue living like a student. The beauty of it is, it’s a one year committment – you don’t have to do it year in and year out forever.

And the longer you wait, the harder the one year challenge would be. If you wait until you’re 30, you’ll have to come up with $30,000 in one year.

Of course you don’t have to do it all in one year (though it’s kind of an exciting concept, isn’t it?). If you can manage to have invested $30,000 by the time you are 30 years old, you can quit saving for retirement and hit 67 a millionaire. That means if you start saving at age 20 you only need put away $2,000 a year for 10 years (earning 10% a year) – and then you’re done. You’ll have $37,000 at age 30 which will grow into $1.3MM in 37 years.

I must point out that $1MM several decades from now will not buy nearly as much as it does today. Still, it’s a nice round number to shoot for. And once you’re in the habit of saving that much I doubt anyone would really be able to stop. If that 20 yr old kept investing $2,000 a year rather than stopping at age 30, she would have $2MM at 67. And if she increased her contributions with inflation (putting in $2,060 in year two, 2,121 in year three, etc) then she’d end up with almost $3MM.

[Note: invest in index funds to minimize fees and within retirement accounts to minimize taxes, and you’ll be even farther ahead!]

More from Meg at The World of Wealth

28 thoughts on “Save For One Year, Retire With $1MM”

  1. Very good point. Wish I had started earlier!

    One item to clarify — The max for an IRA in 2008 is $5,000 (under age 50) or $6,000 (age 50+). The only possible exception I can think of is a SEP IRA if you’re self-employed and make a good chunk of change.

    Otherwise, the $20,500 max referred to applies to 401k/403b employer sponsored plans.

  2. Although mathematically this is feasible, how practical is it? I mean, who honestly get’s 10% returns each and every year. Last year I landed 26% returns on my portfolio, yet 6 months into this year and I’m down 8.9%.

    The tail end of your article is important also, don’t stop saving. I just wrote an article covering the government raising the life expectancy. Now, if today it is 73, what is it going to be in 40 years with all the medical advancements. You may be able to save 1 million by 67, but that money will dry out pretty quick. You need enough to last much longer than a few years after retirement. So, Don’t stop saving at 30, keep on keeping on!

  3. Yeah the only problem is that $1 million is only going to have the buying power of $300,000 today at 3% inflation for 41 years.

    Not to say that you shouldn’t save. But 10% is hard to get in the long run. Warren Buffet has said he does not see this in the future. (Can’t find the quote, but basically things aren’t going to be as good as they have been). Plus right now we are seeing an impact of more than just 3% inflation, using the old CPI calculation its like 12%. But we will see.

    As for me, i am 24, soon to be 25, my wife is 25 and we both nearly max out our 401k. We both might actually do it this year, i think i have a better chance at it. Plus we fully fund our IRAs. So we are saving 40k+ in retirement accounts.

    Then we save 2-3k average per month for a down payment. Then i also save 8% in an ESPP for a future car.

    We already have 100k in retirement accounts. So saving $40k per year at 10% we would have nearly $27 million. But at 3% inflation it will be worth $10 million.

    At 8% it would be $14.7 million and worth $5.9 million at 3% inflation.

  4. I agree with everything in your article. Especially that $1M may be a nice number to shoot for, but most importantly, it will get you into the habit of saving.

  5. I love all the talk about saving — especially doing it early!

    One topic I’d like to see covered as well is to focus on income. I think Dave Ramsey says it helps to have a big shovel, so to speak.

    We focus a lot on encouraging people to save–and truly, you can spend everything you make and be left right where you started–but I’d still like to see an idea like the following:

    What if 20-year old John decides to do something to earn an extra $5,000 per year for the first five years after college? When you start focusing on increasing the income and socking that away, things really get interesting ๐Ÿ™‚

  6. Starting early definnitely has it’s advantages. I also like the idea of talking about being finacially independant instead of retirement. I think most young folks would understand that better than working towards retirement while in their 20’s or 30’s. Let’s face it even folks in their 40’s and 50’s aren’t saving for retiremnt.

  7. I don’t find these examples for very instructive. All it shows me is that for the 26 y.o. lucky enough to be born into a situation (emphasis on “born into”) where they can set money early or where money is set aside for them, life will be just peachy in a few decades. Nice, but how does this really help the typical struggling 26 y.o. who is just barely into a career. It would be the rare person indeed who could put that kind of money away at age 26 and then never touch it for 40 years (no emergencies, down payments, etc.). plus, that 10% return assumption is just flat out irrelevant.

    I feel it is far more helpful to provide real examples, with details, of how ordinary people (and some extraordinary) people were able to navigate real world financial situations and come out ahead.

  8. This sounds so simple, but how realistic is this idea. It is almost impossible to afford something like this especially maintaining a 10% annual return consistently. It is an interesting theory, however. You can also invest $325 per year for the rest of your life when you start at the age of 16 and become a millionaire by the age of 60 if you do the same thing. I think this is a little more feasible, except when your sixteen you just want to spend money on gas and movies.

  9. Miguel: This is the most practical of examples because of it’s simplicity. It shows a formula that works. You don’t have to guess or hope, you just know that $20K now yields $1M in 40 yrs. If you can only do $2K then that yields $100K in 40 yrs. That’s it. There is no way, using this formula, to go anywhere else. Purely practical!

  10. Miguel: I’m doing it and more. I’ve had to pay my own way, grew up below the poverty line. You just need to work hard. I made a decision to work in a high paying field so that helps. It also helped that i worked hard in high school, which got me good scholarships, which made school cheaper, which lead to a good job, that paid for my grad school.

    I guess the main thing is:

    You reap what you sow.

  11. I am 26 and in the last year I have invested 50k, one half of the money I have made. I plan to do this for a couple more years since I know 10% returns are way too optimistic and 1MM in 40 years will not be nearly enough. Great idea though.

  12. Ha! I just knew that this “million dollars” would involve compounding and not appear until many years had passed ;-P

    BTW the non-systemic risk that diversification aims to reduce can be had without a fee by building your own portfolio of about 20 or so stocks in different industries.

  13. Miguel,

    I think you’d be surprised the number of people actually “born into” the lifestyle that saves. Typically, those who are “born into” middle to upper middle class families are the very ones who do not save very well simply because they’ve had what they wanted. Upper class families, in my experience, sometimes hoard their wealth and force their own children to do it on their own. Granted, some may not.

    That being said, I too grew up below the poverty line, attending low income public schools in various housing projects. The child of a single mother household with 3 siblings, we had very little.

    Yet at the ripe young age of 22 I now command a wage that is very close to the 28% tax bracket, without college education.

    Anyone, and I mean anyone, can do what I do and learn what I know with dedication and a public library near by (for internet access, not the books).

    As far as the million dollar returns…I was doing estimations last night with the very concept – seeing 3%, 5% and 7% returns…interesting figures, but you can’t discount the power of inflation. ๐Ÿ™

  14. If a parent or grandparent endowed an infant with 6 months of income, that would be enough to provide for their eventual retirement at that real income. No saving needed. Better than an estate plan.

  15. The best thing you can do is invest any extra cash monthly. You can never have too much money for emergencies, fun, and retirement

  16. Ken has it right.

    I like to think of compounding interest after inflation and capital gains taxes are taken into account. That knocks the 10% down to a probable 5%.

    This way, I feel like I’m dealing with real numbers, something that I might be able to count on.

  17. Wow, 10% annual return! Where is the fund? Iรขโ‚ฌโ„ขd pour all my money to that fund which could guarantee a whopping 10% annual return.
    I hope Napoleon Bonaparte had had access to such a phenomenally ingenious fund manager in 1803, when he sold Louisiana to USA for $0.0438/acre, after interest payment from the States. Had Emperor SAVED and INVESTED 10% of his proceeds in that fund, each $0.00438/acre INVESTED would, after compounding for 204 years at an annual rate of 10%, would have been worth $1,217,977/acre, enough to buy back 243 Louisiana, assuming Louisiana average land price to be $5,000/acre nowadays.
    Or let me put it in this way:
    Had Emperor Napoleon SAVED and INVESTED 10% of his $23,213,568 proceeds in that ingenious fund, the value of the saving, after 204years of compounding at 10%/yr, should have reached $645Trillion, capable of buying all the land on Earth!
    Brilliant fund! Who is the manager? I suppose Warren Buffet would beg to learn from him, LMAO:)

  18. Wow, such great comments and discussion!

    I agree that the 10% annual return is very optimistic, but it’s certainly not impossible. People have very short memories when it comes to returns; right now people want to project 6% from here on out, but just 5 years ago it was very common to project 12% and no one batted an eye.

    Booms and busts will come, sure, but if your portfolio is made of diverse equity holdings including a sizeable chunk in international stocks, then you might just end up with a 10%+ return.

    Who knows? We may be about to enter a decade long period of extreme global development and growth at 20% a year – which will naturally be followed by a severe decline which will scare everybody senseless. ๐Ÿ™‚

  19. I also appreciate that few people have scoffed at the idea of a 20-something being able to put away that kind of money.

    I realize there are those who can’t (particularly those who have few skills and who already have children to care for). But if you are a single, childless 20-something – especially one who can live for free or for very cheap somewhere – then it is perfectly reasonable to save upwards of 50% of your pay. Which for many 20 somethings would be more than $10,000 a year.

    It sounds far fetched, but I know many who do it, and I know many more who could but choose not to. Miguel, you asked for specifics:

    1 – An acquaintance of mine just graduated from college and is about to start a job making about $48,000 a year in a relatively expensive metro area. She’s rented a modest apartment and elected to max out her 401k.

    2 – Several friends of mine in their early 20’s make around $40,000 a year and could easily afford to save $5K a year (they have no debt, their parents still help them out, etc). Instead they splurge on electronics and designer clothes and eat out all the time.

    3 – One guy in his late 20’s I know well makes $30,000 a year. He has a big car payment and credit card debt, but he lives for very cheap by bouncing from his mom’s to his dad’s to a girlfriend’s and so on and saves several hundred dollars a month.

    4 – One very young 20-something couple I know just got married. Their combined income is around $80K. They’ve decided to save half of that (part in retirement accounts, part in cash for a down payment down the road) and plan to delay having kids for at least 5 years in order to really build up a nest egg.

    So inspiring! I feel like I need to go increase my 401k contribution now…

  20. TS, Ken, Preston, I guess I was speaking from my own experiences. I’m 40-something and already worth a few mil, so I figure I do know something about how to achieve the goal. And I can assure you it wasn’t easy, simple, or risk-free, which is why I get annoyed when I read about formulas that make it sound like easy as cake, and ignore risks, taxes, expenses, inflation, varibale returns, etc.

    I grew up in a single-parent household, attended public schools, lived in and near housing projects, dodged drug dealers on the way to elementary school, and basically spent a good part of my childhood at poverty-level. Admittedly, I did not learn much about saving until much later in adulthood when I met my wife and in-laws. I did not have very good early role models on that score – most of the people of my community lived hand to mouth, and if they got a little money, they loaned it to friends who had fallen behind, and so on.

    In general, what I found was that due to having to overcome a lot of early hurdles, it was quite impossible for me to make much headway financially until I was in my mid-30’s. By that time, I had gotten all the craziness of youth out of my system, settled down to start a family, and was well established in a career.

    Growing up poor, ignorant of all things financial, and without a safety net meant that early on, a disproportionate part of my attention and earnings got absorbed by the school of hard knocks, basically by a lot of instability in my life, and by making lots of dumb mistakes. Coming of age in the 80’s recession did not help much either.

    I may be wrong about this, but it seems to me that most people with a good handle on their financial issues at a young age come from stable, hard working, salt of the earth families. Maybe not exactly rich, but with resources, both financial, educational, and cultural. I don’t think most 20-something y.o.’s have the benefit of this kind of background. That’s what I meant by saying the post was unrealistic. But, hey, if you’ve got the money mindset at that age, then more power to you. Just remember to have some fun too, and that it is possible to play a mean game of catch-up later in life. There are many ways to reach the millionaire goal.

  21. Meg – The only thing your examples tell me is that you hang out with a pretty successful and well-heeled crowd. You’re right, at least simplistically speaking, in that those people should be able to save significant portions of their income (we don’t know their full picture). But, I don’t see how this applies to most young people just starting out. When I graduated from college, I had over $60,000 in student loans (in today’s dollars) to repay. Loan payments did not leave much room for saving, or for that matter eating, even on what was a decent salary for back then.

  22. Miguel –

    Thanks for the background, and forgive me if this comes off as insensitive or rude, I do not mean it that way, but things are different these days.

    What I mean by that is that the way the world runs is changing and anyone, and I mean ANYONE who wants to get in on it can. Certainly not only be investing.

    If someone doesn’t have many skills than what better place to get into than an industry that hasn’t been around long? Technology will forever change the face of the way things operate.

    I just don’t buy the “I don’t have anything/time/skills/money to get ahead” these days.

    You implied that you spent more than 10 years sewing your oats. Yet you scoffed at those who took responsibility earlier in life and began making long term plans.

    Can’t afford college (or need to take out lots of loans to do it)? Libraries are free. Granted, that method of learning may not suit your style but if money is tight and its your only option own up and get it done.

  23. Preston,

    Sorry if I came across as “scoffing” at people who take responsibility for their financial affairs. My issues with this post were that it reads like all the other stuff I see on the web that makes achieving financial success look so simple. Life does not work that way. I also noted that people who are generally able to manage their finances early in life usually have some strong advantages from the outset, in the form of family support (both in terms of values and financial support), solid education backgrounds, great role models, etc. That is not the majority of people. I think it takes a lifetime for most people to figure which end is up regarding their finances, if they ever wake up at all. And along the way, lots of sh*t happens. I’ve found that success is a lot about how you deal with problems, overcome challenges, and learn from the mistakes.

    I was only stating my preference that I’d rather see posts about the way real people manage to create real wealth, overcoming real disadvatages, as opposed to the “hey if you put $20K away when you’re 25, you’ll be a millionaire in 40 years” stuff I can read on Yahoo Finance any day of the week. Yeh, if I had an extra $20k laying around when I was twenty-five, that would have been nice, but…So what. Really, What’s the point?

    Maybe I find it really offensive because when I think about being that age and what I was dealing with, it makes me cringe for somebody to suggest that I should have, could have had $20k to invest (or whatever the inflation-adjusted equiv would have been) like it would have been no big deal. So, maybe that’s my own personal issue.

  24. Many people have overcome tremendous odds in order to succeed.

    I started with – 250k debt after getting educated and have been able to increase that net worth by 6x in 5 years.

    In 10 years you are going to be 10 years older no matter what you do for the next decade as long as you are still alive.
    Head-down, hard-work, consistent saving and smart investments can help turn the corner.

    At the age of 26 when you get your first job take out a loan for 20K and invest it. There is nothing like the motivation of debt to kick your a$$ into gear to work hard. You don’t need the silver spoon just some guts.

    There is opportunity and abundance not obstacles and scarcity.

  25. I also do believe that we are all presented the same opportunites in life and that if we dont take advantage of them and those resources out there that there is no room to complain.

    Im not going to paint the poor me story of poverty, missed meals, and hardship. I grew up very middle class, possibly lower but I had the same as everyone else did, it was a typical blue collar town.

    I worked hard in high school to get a scholarship and ofcourse college. I missed many a party, weekend trip and trip to the bar in my 5 years and graduated with honors. It sucked was a lot of work, and at times I admit I got lazy (3.1 GPA one semester lol) but graduated with my masters. At 23 I was assisting an orthopedic surgeon in surgery as a Physicain Assistant and still do to this day.

    Ive also taken on 2 other per diem jobs in an ambitious attempt to be wealthy. My friends and roomate scoff at the thought of 3 jobs while they relax and complain about gas prices and shrinking middle class. At 27 years old I make over 100K per year combinded and work 60+ hours a week. Others in my profession in less demanding fields are comfortable with 50K per year less hours but I wanted more.

    Im going to contribute 20,500 to my retirement fund this year which stands currently at roughly 50K. 3 years ago it was $0.00 with my only other contributions being a 3% employer match.

    My first two years out of school on a 50K salary I paid off 42,000 in combined debt from car (9K) and student loans (33K). I currently have no credit card debt and a net worth of roughly $115,000. Three years ago it was $-62,000. My friends consider me cheap and laugh when i take their cans that they leave at my appt back to the store. (is it? lol)

    The above is no attempt to gloat and as far as Im concerned very good but by no means exceptional. I know others who make more than me (MD’s) in worse financial shape. I have chosen to live WELL within my means and will be financially stable for the rest of my life.

    As far as a 10% return I think that is very realstic. There are many good blue chips yeilding 3.5, 4, 4.5% right now with potential to jump signifigantly in the future. Long term dividend growth with consistant good returning stocks bought at opportune times over many years isnt a horribly hard task. All it takes is some dedication and reading, not hot stock tips from CNBC and your buddy at work.

    Anyway good luck and some advice to other who feel as if they are disadvantaged or cant do it some tips…live below your means, budget yourself, read, read, and read some more about finance. There is a reason why the rich get richer……

  26. and as mentioned above please excuse any spelling errors, I found a couple already! ๐Ÿ˜‰

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