It's not hard to find people who dream about the day they can retire and free themselves from the weekly grind of work. Aside from just retiring, though, most people would likely tell you they dream of a retirement that's as financially stress-free as possible. No single number affords this financial security, but the million-dollar mark is often considered a key milestone in those ambitions.
For many people, retiring as a millionaire seems like a lofty goal, but I'm here to tell you it's more easily accomplished than you might realize. To build a million-dollar nest egg, there's one vital action you need to take: starting. Although it seems simple, it's a step that's the foundation for making the seven-figure dream happen.
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The eighth wonder of the world
Many consider Albert Einstein one of the most intelligent people ever to walk the earth. Einstein is credited with calling compound interest the "eighth wonder of the world," and after seeing how powerful it is in investing, I think I'd agree.
In finance, compound interest can be a two-edged sword. On one side, compound interest on debt can cause it to spiral out of control. On the other, compound interest (or compound earnings, as some refer to it) can be a wealth-generating machine.
Compounding occurs when the interest you earn on investments begins to earn interest on itself. Because of this, many people can achieve a million-dollar retirement, but the key is to give compound interest enough time to fully work its magic. Time is to compound interest what wind is to a sailboat: the more, the faster.
Seeing compound interest in action
To clearly see the power of compound interest, let's assume you make a single $10,000 investment and earn 10% interest annually for 10 years. If you remove the $1,000 you earn each year, you will have earned $10,000 over those years.
However, if you leave the interest you earn in your investment and let compounding kick in, here's how it would look through those 10 years:
| Year | Starting Balance | Interest Earned | Ending Balance |
|---|---|---|---|
| 1 | $10,000 | $1,000 | $11,000 |
| 2 | $11,000 | $1,100 | $12,100 |
| 3 | $12,100 | $1,210 | $13,310 |
| 4 | $13,310 | $1,331 | $14,641 |
| 5 | $14,641 | $1,464 | $16,105 |
| 6 | $16,105 | $1,610 | $17,715 |
| 7 | $17,715 | $1,772 | $19,487 |
| 8 | $19,487 | $1,949 | $21,436 |
| 9 | $21,436 | $2,144 | $23,580 |
| 10 | $23,580 | $2,358 | $25,938 |
Calculations by author.
By taking the interest out each year, you would have $20,000 at the end of 10 years ($10,000 + $10,000 in earned interest). By letting your interest compound, you would have increased your total to nearly $26,000 at the end of those years with no extra work involved. The latter choice is how a million-dollar retirement becomes feasible.
One investment that could lead you to the promised land
A good thing about investing your way to the $1 million mark is that it doesn't require being savvy investors who dedicate their lives to all things stocks. It has historically been possible to accomplish this by simply investing in the S&P 500, the stock market's primary benchmark.
The S&P 500 has historically averaged around 10% annual returns over the long run. You should never use past results to predict future performance, but if we assume this trend continues, here's how long it would take you to reach $1 million based on how much you invest monthly:
| Monthly Investment | Years Until $1 Million | Personally Invested |
|---|---|---|
| $500 | 31 | $186,000 |
| $750 | 27 | $243,000 |
| $1,000 | 24 | $288,000 |
| $1,500 | 20 | $360,000 |
| $2,500 | 18 | $432,000 |
Calculations by author. Years rounded to the nearest whole year.
Suppose you work 40 years and strictly save money instead of investing it. You'd have to save $25,000 annually to cross the $1 million threshold. For most people, this isn't remotely feasible when you consider taxes and all the other expenses necessary for daily life. However, with compound interest, it can be accomplished in much less time and much less personal investment. So while you're working for your money, make sure your money also works for you.
