Workers are often warned not to rely too heavily on Social Security and instead, take steps to build savings to bring with them into retirement. And your goal may be to amass a large nest egg -- one that supports your many retirement goals.
But are you aiming for $3 million in retirement savings? You may not be. After all, that's a pretty large number to target. But if you play your cards right, you could end up sitting on upwards of $3 million by the time your senior years roll around.
What will investing $400 a month do for you?
If you have access to an IRA or 401(k) plan, your goal may be to get as close as possible to maxing out your annual contributions. But even if you can't do that, if you can part with $400 a month over the duration of your working years, you can build serious wealth.
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In fact, if you sock away $400 a month over a 43-year period, and your invested savings generate an average annual 10.5% return, then you'll end up with $3.3 million. And that should be enough money to enjoy retirement to the fullest.
Of course, that begs the question: How do score an average yearly 10.5% return on your investments? The quick answer is that that return is by no means guaranteed. But if you load up on S&P 500 index funds and hold them for many years, there's a good chance you'll see a return in that ballpark.
From 1957 through 2021, the S&P 500 index graced investors with an average annual return of 10.5%. Now to be clear, that doesn't mean the index performed consistently well every single year during that period. In fact, it ended several years during that time in the red.
Rather, that average annual 10.5% return accounts for both strong years on the part of the index and years during which it underperformed. But if you're talking about investing in the broad market for 40-plus years, then there's a good chance your portfolio will enjoy a comparable return.
Commit to saving early on
Some people don't start focusing on retirement savings until they reach their 30s, 40s, or even beyond. But if your goal is to amass millions for your senior years, and you don't want to part with a ton of money on a monthly basis to make that happen, then you'll need to start early.
In our example, we used a 43-year savings window. That's reasonable if you start dedicating funds to your retirement savings at age 24 with the goal of retiring at 67, which is full retirement age for Social Security purposes if you were born in 1960 or later.
If you don't manage to start saving for retirement until age 30, and you can't swing more than $400 a month in your IRA or 401(k), then you may need to work until your early 70s to hit that $3 million target. The point, either way, is that it doesn't take a huge sum of money on a monthly basis to amass a lot of wealth. It just takes a lengthy savings window and the right investment.
To delve into the concepts presented in the article, let's break down the key elements:
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Retirement Savings and Goals: The article emphasizes the importance of saving for retirement beyond relying solely on Social Security. It suggests aiming for a substantial nest egg, potentially reaching $3 million, to support various retirement goals.
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Monthly Investment Amount: Investing $400 a month over a long period is highlighted as a strategy to build significant wealth for retirement.
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Investment Return and Strategy: The article suggests achieving an average annual return of 10.5% on investments to reach the $3 million target. It emphasizes the historical performance of the S&P 500 index as a potential vehicle for this return.
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Early Commitment to Saving: Starting to save for retirement early is strongly recommended, indicating that beginning at age 24 with consistent contributions until retirement age can help achieve the desired financial goal.
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Savings Duration: The article uses a 43-year savings period as an example, assuming a retirement age of 67 (the full retirement age for Social Security purposes).
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Impact of Delayed Savings: It highlights the necessity to adjust the savings amount or retirement age if one starts saving later in life or cannot contribute higher amounts monthly.
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The Relationship Between Investment, Time, and Wealth Accumulation: The article emphasizes that amassing substantial wealth doesn't necessarily require significant monthly contributions but rather a lengthy savings period and appropriate investment choices.
The article essentially promotes the idea that through disciplined, consistent saving and strategic investment in vehicles like index funds, individuals can potentially achieve substantial wealth for retirement, even with relatively moderate monthly contributions. The critical factors are the early initiation of savings, a long-term commitment, and a balanced investment approach geared toward historically successful market indices.
