What if there were a way to spend all of your money, forgoing any saving or investing, and still retire as a millionaire? If you think that sounds too good to be true…I’d have to agree. Unless you’ve got a trust fund or large inheritance coming your way, you’ll probably need to do some amount of saving in order to retire comfortably. However, the amount of saving required is much less than you might expect. In fact, 5 years of moderate saving could be enough to make you a millionaire in retirement. That’s no typo. Save for 5 years, then never save another penny for the rest of your life and retire a millionaire. How can this amazing feat be accomplished? It’s actually relatively easy.
As I’ve stated many times on this site, time is the most powerful investing tool you have at your disposal. The more time you have before reaching retirement, the less you’ll need to invest. This, of course, is due to the power of compound growth. Let’s break down the numbers.
If we assume a compound growth rate of 8.5% per year, what one-time lump sum amount would need to invest in order to have $1,000,000 at the end of a full career (approximately 40 years)? The answer is, about $38,500 (try this calculator to work it out yourself).
In other words, if you were to deposit a lump sum of $38,500 into an investment account and ignore it for 40 years without making any additional contributions, you’d retire a millionaire. What about shorter time periods?
|Years Until Retirement||Lump Sum Investment Needed To Retire A Millionaire|
Now I bet you're thinking, "Sooo...where does the 'only 5 years of investing' part of this strategy come into play?" Great question! In order to invest a lump sum, you must first accumulate the funds it is made up of. You will use the 5-year saving/investing period to do just that.
Building Your Investment
Imagine a 20-year-old who has plans to retire as a millionaire at 65. In order to achieve this goal, all she would need to do is save $38,500 before turning 25 years old. This would leave the required 40 years (See table above) for the money to grow into $1,000,000. Once the initial $38,500 has been accumulated, there would be no need for her to save a single additional dollar for retirement, for the rest of her life.
If she were to simply save the money in a bank account over the 5 year period from age 20 to 25, she would need to deposit about $640 each month to reach $38,500 in savings. Not too bad if it means she’ll never have to save for retirement again. However, there is a better way. If instead of putting her money in a bank, she invested it over the 5 year period she would only need to contribute about $520 per month (or $120 per week) to her investment account to accumulate the desired $38,500 (assuming an 8.5% rate of return).
Invest $120 a week for 5 years short years, spend every dollar you make in your career thereafter, and retire with a $1,000,000 net worth. Sounds like a good plan to me.
Saving rates to accumulate lump sum amounts
|Weekly Investment||Monthly Investment||Approx. Balance after 5 Years (8.5% rate of return)|
Beyond 5 Years
The purpose of this exercise is not to discourage consistent saving, I merely wanted to demonstrate how valuable even a relatively small amount of savings could be if given enough time to grow. Ideally, you wouldn’t stop saving after just 5 years. On the contrary, it would be best to continue saving and investing throughout your career, increasing your contributions as your income grows over time.
With that in mind, let’s project out the numbers from above and see what would happen if someone continued to save at a steady rate for their entire career, instead of only 5 years.
Monthly Investment Years Of Continuous Investment Final Balance (8.5% rate of return)
$520 45 $3,278,487
$780 40 $3,177,233
$1,170 35 $3,058,937
$1,755 30 $2,914,429
$2,635 25 $2,732,561
If you are someone who enjoys spending money and you're not looking to achieve super early retirement, suspending your spending to dedicate just 5 short years to saving and investing may allow you to maintain your money splurging habits for the vast majority of your career while also securing your financial future. This is because, given enough time, even a small investment will grow into a significant nest egg. So be sure to invest early and often to build up a solid foundation. Even if you don't maintain your investing habits throughout your life, that initial sum could make you a millionaire.
Tools To Get You Started
Get a head start on your journey toward achieving financial independence by analyzing and tracking your income, expenses, investment performance, and overall net worth with the free online wealth management tool Personal Capital.
We use Personal Capital regularly to analyze our investment fees, track our investments, and project our net worth. We also periodically review our progress toward retirement with their retirement planning calculator.
If you’d rather do things on your own, become a subscriber today and you’ll receive our Free Financial Planning Dashboard. This tool allows you to enter your income and expenses to create a detailed budget. You can use it to track your spending habits over time or just to get an idea of where your money is going each month. Take a look at the automatically generated charts and you may discover you have a little more cash to invest than you thought.
If you’re interested in detailed instructions on how to budget, save, pay off debt, and invest, check out The 6 Phases of Building Wealth. This book provides step-by-step instructions for working through each “Phase” in the process of achieving Financial Freedom. If you're just starting out, the information in this book will provide you with an invaluable resource. You can pick up the digital version for only $2.99 on Amazon.
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