There's no cookie-cutter financial roadmap or universal approach to financial freedom. However, many would agree that the $1 million mark is a key milestone in the journey toward financial freedom in retirement. There's just something about it that has a nice ring to it.
Luckily, hitting the million-dollar mark doesn't have to be a pipe dream. With enough time on your side and patience, it's a goal many can accomplish. For people looking to grow $100,000 into $1 million in retirement savings, the following three steps can accelerate your progress. It's not foolproof by any means, but it's a great framework to use.
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1. Invest a lump sum and let compounding work its magic
You could argue that the most powerful force in investing is compounding. It's one thing to invest and earn a return on your investments. It's another, more transformative thing when you reinvest those returns and they just to earn their own return. That's what compound interest is.
As an example, let's assume you invest $100,000 and earn a 10% return annually, reinvesting your profits each year. Here's roughly how your investment would shape up each year:
| Year | Starting Balance | Earnings | Ending Balance |
|---|---|---|---|
| 1 | $100,000 | $10,000 | $110,000 |
| 2 | $110,000 | $11,000 | $121,000 |
| 3 | $121,000 | $12,100 | $133,100 |
| 4 | $133,100 | $13,310 | $146,410 |
| 5 | $146,410 | $14,641 | $161,051 |
| 6 | $161,051 | $16,105 | $177,156 |
| 7 | $177,156 | $17,716 | $194,872 |
| 8 | $194,872 | $19,487 | $214,359 |
| 9 | $214,359 | $21,436 | $235,795 |
| 10 | $235,795 | $23,580 | $259,375 |
Calculations by author. Numbers rounded to the nearest dollar.
If you removed the return you earned yearly, you would've only made $100,000 over those 10 years. However, with compounding, you would've earned nearly $160,000 in that span with no extra work. Because of compounding, a $100,000 lump-sum investment could reach $1 million in just over 24 years by averaging 10% annual returns.
Of course, there's no way to predict stock annual returns, but this points to the beauty of compounding and the heavy lifting it can do if you give it enough time to unleash its potential. Removing your earnings each year (and not allowing compounding to do its work) would take 90 years to go from $100,000 to $1 million.
2. Speed up the process with additional contributions over time
Having $100,000 to invest is a great feat on its own, but that doesn't mean you have to stop there when aiming for the million-dollar mark. Investing the lump sum and then making ongoing contributions can greatly speed up your process, with even relatively small amounts.
For example, contributing an extra $500 monthly could cut around four years off the timeline and help you hit $1 million in around 20 years. Doubling those monthly contributions to $1,000 could shave off a few extra years and help you reach your mark in just over 17 years.
There's no need to invest $100,000 and then be complacent if you don't have to. Keep investing consistently and let your money work for you.
3. Take advantage of dividend reinvestment programs
An underrated feature most brokerage companies offer is a dividend reinvestment program (DRIP). With a DRIP, your brokerage platform automatically takes the dividends you're paid and reinvests them into the company or fund that paid it out, buying more shares.
Instead of taking your dividends as cash payouts, using a DRIP can greatly increase the number of shares you own and add to the effects of compounding. You may miss the quarterly cash payouts while using a DRIP, but it tends to pay off in retirement when your share count is higher than it would have been.
Building on the first example above, let's assume that in addition to a 10% average annual gain in the prices of your investments, you also received an average dividend yield of 2% over the roughly 24 years it took to go from $100,000 to $1 million by investing a lump sum. Had you reinvested all your dividends over that span (essentially earning a total of 12% annually), you would have over $1.5 million in 24 years. Or you could look at it another way, with the time it takes to reach $1 million being cut down to around 21 years.
Once you reach retirement and have maximized your shares using a DRIP, you can begin taking cash payouts. A 2% dividend yield on $1 million worth of stocks is $20,000 in annual dividend income. That much passive income is always welcomed, but especially so in retirement when many people have a fixed income.
