Setting aside whatever money you can into a well-diversified growth fund can be a move you'll thank yourself for in the future.
You don't need thousands of dollars to start investing and saving for retirement. Breaking it down to a few hundred dollars per month that you invest into stocks can make all the difference in your retirement years. Whether it's reducing the number of times you eat out or go to the movies, collectively those changes can free up money in your budget, which could go a long way.
Here's how setting aside $200 per month for 30 years and investing it can lead to more than $1 million by the time you retire.
Investing in growth funds can lead to great returns
A big challenge for many people when it comes to investing is that it can be overwhelming and difficult to know which stocks to buy or not to buy. Exchange-traded funds (ETFs), however, can drastically simplify that equation for you. By giving you exposure to a diverse a mix of stocks, you no longer need to worry about tracking individual stocks and determining whether you need to change anything in your portfolio.
Instead, you can invest in funds which focus on long-term growth. One such example is the Vanguard Growth ETF (VUG -0.94%).
This ETF has a small expense ratio of just 0.04%, which is important in the long run, as it means fees won't take out a big chunk of your overall returns. It focuses on investing in large U.S. stocks where there are strong growth opportunities. This is by no means the only growth fund that may be suitable for a long-term investing strategy, but it's definitely one of the better ones to consider.
The Vanguard Growth ETF contains more than 200 stocks, with its largest holdings being Apple, Microsoft, and Amazon. Approximately 55% of the fund's holdings are in tech stocks, with consumer discretionary stocks being a distant second, accounting for 20%. Over the past 10 years, the fund has generated total returns (including dividends) of 280%, which is far better than the S&P 500's total returns of 217% over the same period.
The path to $1 million
The ETF's returns over the past 10 years average out to a compounded annual growth rate of 14.3%. The good news is you would need less than that to get to $1 million if you invest $200 per month.
If you were to invest $200 per month over the course of the next 30 years, that would equate to a total investment of $72,000. That's significant, but it's through the effects of compounding that would get your portfolio to a more than $1 million valuation.
For a growth-oriented fund such as the Vanguard Growth ETF to get your portfolio to more than $1 million after 30 years, it would need to grow at an average rate of at least 13.6% -- that's lower than its 10-year average annual return, although it is above the longer-term growth rate of the broader stock market as a whole. This assumes that you continue to invest $200 per month into the fund.
Here's a breakdown of what your portfolio's balance would look like at every five years under this scenario:
| Year | Balance |
| Five | $17,246.38 |
| 10 | $51,158.69 |
| 15 | $117,841.92 |
| 20 | $248,964.03 |
| 25 | $506,795.09 |
| 30 | $1,013,779.41 |
Calculations by author.
The power of compounding comes in later years, when you've built up a large balance. At that stage, a 13.6% increase every year will have a much greater effect than when your portfolio is much smaller.
Thus, a key part to making this strategy work is ensuring that you expect to have 30 years or more to go until retirement. You can still generate a great return even if you don't, but to get to $1 million with a $200 monthly investment, you'll ideally want to have around that number of investing years left. If you don't, you could offset this by investing more money each month.
Investing early and often is the key
Regardless of which ETF you may want to invest in, focusing on one that invests in growth stocks can put you into a great position to profit from strong returns in the future. As long as you commit to investing $200 per month or whatever you can afford, you'll put yourself into a much better financial position by the time you retire.
Ideally you can get to the $1 million mark, but even if you don't, saving and putting aside money every month into a diversified fund such as the Vanguard Growth ETF can be a decision that pays off significantly in the future.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, and Vanguard Index Funds - Vanguard Growth ETF. The Motley Fool has a disclosure policy.
FAQs
The path to $1 million
How much do I need to contribute to my 401k to reach $1 million? ›
How Long Will Becoming a 401(k) Millionaire Take? If you invested $23,000 into your 401(k) each year and earned a consistent 8% return each year, you'd achieve a plan balance of $1 million in slightly under 20 years. Note that this does not factor in a potential employer match.
How much is $200 a month for 30 years? ›
| Time Invested | Total Money Invested | Estimated Total Balance |
|---|
| 10 years | $24,000 | $35,604.24 |
| 20 years | $48,000 | $116,104.83 |
| 30 years | $72,000 | $298,115.34 |
Oct 20, 2023
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
How much will 1 million generate in retirement? ›
A $1 million retirement account gives you around $40,000 per year for the first few years of your retirement. Once Social Security kicks in, this will give you on average anywhere from $65,000 to $95,000 per year depending on your lifetime earnings and when you began collecting benefits.
How much do you need in a 401k to retire at 65? ›
We estimated that most people looking to retire around age 65 should aim for assets totaling between 7½ and 13½ times their preretirement gross income. From there, we identified savings benchmarks at other ages based on a reasonable trajectory of earnings and savings rates.
Can I retire at 55 with $1 million in 401k? ›
It's definitely possible, but there are several factors to consider—including cost of living, the taxes you'll owe on your withdrawals, and how you want to live in retirement—when thinking about how much money you'll need to retire in the future.
Is $200 a month good for retirement? ›
If you were to invest $200 per month over the course of the next 30 years, that would equate to a total investment of $72,000. That's significant, but it's through the effects of compounding that would get your portfolio to a more than $1 million valuation.
What if I invest $200 a month for 20 years? ›
Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.
What happens if you invest $200 a month for 10 years? ›
How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.
Best monthly income plans you should consider
| Monthly Income Plan | Minimum period of investment | Rate of returns |
|---|
| Pradhan Mantri Vaya Vandana Yojana (PMVVY) | 10 years | 7.4% p.a. |
| Systematic Withdrawal Plans (SWPs) | 5 - 40 years | 7-13% |
| Long-Term Government Bonds | 10 yaers or more | 6-9% |
| Mutual Fund Monthly Income Plans | ELSS Funds : 3 years | 8-15% |
5 more rowsApr 10, 2024
Here's my list of the 10 best investments for a 10% ROI.
- How to Get 10% Return on Investment: 10 Proven Ways.
- High-End Art (on Masterworks)
- Invest in the Private Credit Market.
- Paying Down High-Interest Loans.
- Stock Market Investing via Index Funds.
- Stock Picking.
- Junk Bonds.
- Buy an Existing Business.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
How much to retire comfortably at 65? ›
Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that, if you earn $100,000 per year, you'd aim for at least $80,000 of income (in today's dollars) in retirement.
Can I retire at 65 if I have $1 million in a 401k and will receive $2500 monthly from Social Security? ›
Here, say that you have $1 million in a 401(k) or IRA, and expect to receive $2,500 per month in Social Security payments, a number right in the mid-range of possible benefits. Can you retire at 65? Well, it certainly depends on your standard of living. But for most people the answer is yes.
How do millionaires live off interest? ›
Living off interest involves relying on what's known as passive income. This implies that your assets generate enough returns to cover your monthly income needs without the need for additional work or income sources. The ideal scenario is to use the interest and returns while preserving the core principal.
How do I turn my 401k into millions? ›
Becoming a 401(k) millionaire is a challenging task. However, the formula is simple: start early, save consistently, take the matching contributions, and invest in stock and bond funds without taking on too much risk close to retirement.
Can I retire with $300000 in my 401k? ›
If you've managed to save $300k successfully, there's a good chance you'll be able to retire comfortably, though you will have to make some compromises and consider your plans carefully if you want to make that your final figure.
How much monthly income will $1 million generate? ›
With cash, and assuming a 30 year retirement, you can expect to withdraw about $2,700 per month. ($1 million / 30 years = $33,333 / 12 months = $2,777) With your $2,500 in Social Security, this would give you about $5,200 per month to live on.
