Lets be honest we all want to save a million bucks or more before we retire. We all want to.
So I decided in this blog let me talk a bit about on how you can save a million or more before we retire so that we can a nice relaxing life.
So lets see: If you begin putting away $100 a month starting now and continue doing so until 2047, the year you'll turn 65, you would need an annual return of roughly 13.5% a year to turn that monthly hundred dollars into a million bucks.
What investment options can deliver a 13.5% annual return for almost 40 years?
None that I know of. A 13.5% long-term annual return is nearly 40% higher than the 9.8% annualized that stocks have gained over the past 80-plus years, and that near-10% figure includes some pretty dramatic run-ups in the '80s and '90s that we may not see again for a long time.
Suffice it to say that it would be wishful thinking to expect anything close to 13.5% over the long run.
If you increase the amount you save, however, you'll see that the return you need to reach your goal becomes more manageable. Save $250 a month until you're 65, for example, and you would need a 10% annualized return to hit that $1 million target.
I still consider that overly optimistic even for an all-stock portfolio, given the prices stocks are selling at today and the uncertainly surrounding the growth prospects here and abroad.
The idea behind this exercise, however, isn't to make predictions about the long-term returns for stocks and bonds. Rather, my point is to show that the more you save, the less you have to count on lofty returns. It's important to keep that in mind because ultimately we have more control over how much we save than the investment returns we earn.
Generally, though, you're probably talking somewhere between 70% and 90% in stocks with the rest in bonds (by which I mean a diversified portfolio of stocks and bonds, along the lines of what you might get combining the total stock market and total bond market funds in our
Money 70 list of recommended funds.) The more anxious you get during market downturns, the closer you'll probably want to be to the low point of that range.
Of course, you could go even more conservative, even to the point of not investing in stocks. But
such a cautious approach means you'll have to pump up your savings effort quite a bit.
If you'd like to see how your chances of accumulating a million bucks changes with different savings amounts and varying mixes of stocks and bonds, check out
Morningstar's Asset Allocator tool.
I'm not sure how you arrived at $1 million as your goal. Maybe it's just a nice big round number.
Remember, though, having a million bucks 37 years from now isn't like having that sum today. In fact, assuming a modest 2.5% inflation rate, $1 million in 2047 would be the equivalent of having about $400,000 now. Or, viewed another way, you would need about $2.5 million in 2047 to have the purchasing power of $1 million today.
Finally, rather than shooting for a big lump sum, I think you're better off thinking about how much income you'll eventually have to replace to maintain your standard of living in retirement, and then figuring out what combination of saving and investing, along with other resources like Social Security, gives you a reasonable shot at hitting your goal.
T. Rowe Price's Retirement Income Calculator can help you on that score.
Granted, at your current age any estimates you arrive at are going to be rough. After all, a lot can change over the course of 37 years. But if you save diligently, invest reasonably, monitor your progress regularly and make adjustments as you go along, you'll improve your chances of hitting 65 with the level of savings you need, whatever amount that turns out to be.
your Finance Guru
