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The three different return rates were 3% (a conservative portfolio of mostly bonds), 6% (a combination of stocks and bonds) and 9% (a portfolio that's stock-heavy or contains index or mutual funds yielding around 9% on average). He used a retirement age of 65 to give 45 year olds 20 years to save. By the traditional retirement age, 45 year olds would need to invest a monthly amount to become a millionaire.
A 45 year old would need to invest $3,100 per month for the next 30 years to reach $1 million by age 65.
They would have to invest $2,200 per month for 20 years to end up with $1 million if they contributed to investments that give a 6% yearly return.
If they choose investments that give a 9% yearly return, they would need to invest over a thousand dollars a month for 20 years to reach $1 million.
If you start investing for a 9% yearly return at 40, you would need to put in $950 per month for the next five years to reach $1 million by 65. If you wait until 45 you will have to contribute less than $650 per month.
The earlier you start investing, the less money you have to put into your investments. compound interest is the most powerful because it has more time to grow.
It may feel like a squeeze to make such aggressive contributions. Since you get older, you may have expenses that you didn't have when you were younger, like caring for aging parents, making life insurance payments, or paying tuition for children who are ready to head to college.
It can be difficult to make aggressive contributions to your investments. Even small contributions can grow and have a huge impact on your financial situation over time. If you start with something, you will be in a better position than if you don't invest at all.
Even if you can't afford to invest a lot of money, the sooner you start investing, the more time compound interest has to work.
If you don't know how much you can afford to invest, you might consider an app like Acorns, which allows users to invest the spare change they accumulate from everyday purchases like coffee, textbooks and clothing. You are investing in the change from purchases you were going to have to make anyway.
If you can't afford a full share of the companies you're interested in, you can invest in fractional shares on other apps. A fractional share is a portion of a stock's share based on the amount of money you want to invest rather than the number of shares you want to purchase. You can still get some skin in the game.
If you prefer a hands-off approach, some apps, like Wealthfront and Betterment, can help you determine which investments make sense for you based on your risk tolerance, goals and retirement date. You don't have to worry about adjusting the allocation.
It is important to note that when investing in stocks, you shouldn't just throw your money at random individual stocks. The S&P 500 is a good example of an index fund that tracks the stock market as a whole. The S&P 500 has historically returned an average of 10% to 11% annually, so you might expect a fund tracking this index to produce similar returns. Past returns do not guarantee future success.
Investing can grow your money very quickly. It can seem daunting at first but starting small can make a difference. If you really want to invest $1 million, the sooner you start, the more time your money will have to grow.
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