How To Retire A Millionaire After Only 5 Years Of Investing

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?

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.

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 In 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.

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