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.
Image source: Getty Images.
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.
As a financial expert and enthusiast with a deep understanding of investment strategies and retirement planning, I can provide valuable insights into the concepts discussed in the article. My expertise is grounded in a comprehensive knowledge of financial markets, investment vehicles, and long-term wealth accumulation.
The article emphasizes the importance of building substantial retirement savings, specifically aiming for a target of $3 million. The key strategy proposed involves investing $400 a month over a 43-year period with the goal of achieving an average annual return of 10.5%. Let's break down the concepts mentioned in the article:
-
Investment Goal: $3 Million Retirement Savings
- The article suggests that individuals may aspire to accumulate $3 million for retirement to support various financial goals during their senior years.
-
Monthly Investment Amount: $400
- To reach the $3 million target, the article recommends investing $400 per month consistently over a long-term period.
-
Investment Duration: 43 Years
- The proposed savings window is 43 years, which is considered reasonable for those aiming to retire at 67, the full retirement age for Social Security purposes for individuals born in 1960 or later.
-
Average Annual Return: 10.5%
- The article assumes an average annual return of 10.5% on invested savings over the 43-year period to achieve the $3 million goal.
-
Investment Vehicles: IRA or 401(k)
- The article mentions the use of Individual Retirement Accounts (IRA) or 401(k) plans as potential investment vehicles to achieve retirement savings goals.
-
Investment Strategy: S&P 500 Index Funds
- While acknowledging that a 10.5% return is not guaranteed, the article suggests that investing in S&P 500 index funds and holding them for an extended period increases the likelihood of achieving a comparable return. Historical data from 1957 to 2021 is cited to support this claim, highlighting the S&P 500's average annual return of 10.5%.
-
Importance of Early Saving
- The article emphasizes the significance of starting to save for retirement early in one's career. It illustrates that beginning to save in one's 20s can provide a more achievable path to reaching the $3 million target compared to starting later in life.
-
Impact of Delayed Saving
- The article warns that delaying the start of retirement savings or contributing less than the suggested $400 per month may result in the need to work until one's early 70s to reach the $3 million target.
In summary, the article provides a strategic approach to retirement planning, highlighting the combination of consistent monthly contributions, a long savings window, and a well-researched investment strategy to achieve substantial wealth for retirement.
