It sounds like a pretty good goal… just make sure you sock away a million dollars by the time you’re 40 years old. So, how do you do it? Matt Krantz at USA Today has crafted the most practical strategy he could think of to accomplish the deed.
First, he assumes you’re 23, with a salary of about $40,000, and he ignores inflation, just to greatly simplify the maths. Then, after taxes and expenses, he figures saving up about 10 per cent per year is realistic, as is a two per cent raise each year. He also assumes you manage a 10 per cent average annual return including dividends.
Where’s that leave you? By 40, you’ll have racked up about $227,000 in savings. Not at all shabby, but far shy of a million dollars. At that rate, you’d have to keep saving until 54 to reach your goal.
Instead, he suggests a more effective plan:
“What, then, is required to hit $1 million by 40? The first thing investors try to do is chase after highflying investments that will be their ticket to riches. But this approach brings the potential for disaster. To be a millionaire by 40, you’d have to get an average annual rate of return of 24% over the next 18 years. I can’t stress how difficult that’s going to be. A return of 24% is nearly three times the long-term average return of the Standard & Poor’s 500. Getting that return would require a huge increase in risk, risk that could wipe out your dreams after just one bear market.
“So if chasing returns isn’t the answer, what is? How about if you saved more? Clearly, if you squirrel away more money, and successfully invest at 10% returns, you can make your goal. But I hope you like eating 25-cents-a-pack ramen noodles. You’d have to save nearly 45% of your gross income to be a millionaire by 40. We all know some frugal people, but saving nearly half your gross income is probably not realistic.
“What if you could put your career on the fast track? Instead of boosting your income 2% a year, you get a better-paying job, do some moonlighting and boost your income. Well, you’d better get cracking. You’ll need your income to rise 21% a year over the next 18 years to make this happen. You’d need to boost your annual income from $40,000 to more than a $1 million by the time you’re 40 for this to all work out.”
It sounds a bit frustrating at first, but Krantz points out that if you manage to put away 20 per cent of your salary, earn a four per cent raise each year, and lock in 10 per cent average annual returns, your portfolio will hit $518,000 by your 40th birthday. Even more encouraging… he points out that if you can keep it up for just another few years, you’ll be a millionaire by 46. Not too bad. You can read all the details behind the strategy in his USA Today post on how it’s possible to put away $1 million by the time you’re 40.
How to Become a Millionaire by the Time You’re 40 originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.
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