By JLP | June 18, 2008
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!]
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