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 1.55%).
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.
Is 200 a month good for a 401k? ›
Other personal financial advisors say that workers should invest between 6% and 10% of their monthly income. 1 If you make $2,000 a month, this target sets the goal of between $120 and $200 monthly.
How much is $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.
How much to invest monthly to reach $1 million? ›
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 many Americans have $1000000 in their 401k? ›
All told, there were 422,000 retirement savers in Fidelity 401(k) plans sporting balances of seven figures and beyond as of Dec. 31, up from 349,000 at the end of September and 299,000 at the end of 2022. There were also 391,562 IRA millionaires on Dec.
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.
What if I invest $200 a month for 30 years? ›
If you're investing $200 per month while earning a 10% average annual return, you'd have around $395,000 after 30 years.
What is the average 401k balance at age 65? ›
What is the 12 month rule for 401k? ›
In addition, if the employer cannot distribute the plan's assets as soon as administratively feasible—generally within 12 months of the termination date, then the plan is not considered terminated, and future compliance requirements should be met.
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.
What happens if you invest 200 a month in the S&P 500? ›
The magic of compounding. Now let's put this to work. All of this means that if you invest $200 per month in the SPDR S&P 500 ETF over the next 15 years, your investment could reach $76,254. That's thanks to compounding, or the idea that gains will create more gains as time goes by.
What happens if you save $100 dollars a month for 10 years? ›
How $100 a month can help make you wealthy
| If you invest $100 a month for this many years... | ...this is how much you'll end up with. |
|---|
| 10 | $21,037.40 |
| 15 | $41,939.68 |
| 20 | $75,603.00 |
| 25 | $129,818.12 |
2 more rowsOct 1, 2023
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 do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
How to become a millionaire in 5 years? ›
Here are seven proven steps to get you wealthy in five years:
- Build your financial literacy skills. ...
- Take control of your finances. ...
- Get in the wealthy mindset. ...
- Create a budget and live within your means. ...
- Step 5: Save to invest. ...
- Create multiple income sources. ...
- Surround yourself with other wealthy people.
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.
At what age should you have $1 million in retirement? ›
Retiring at 65 with $1 million is entirely possible. Suppose you need your retirement savings to last for 15 years. Using this figure, your $1 million would provide you with just over $66,000 annually. Should you need it to last a bit longer, say 25 years, you will have $40,000 a year to play with.
How much to save to have $1 million at retirement? ›
The results: If you started saving $100 a week at age 25, you'd have over $1 million by age 65. If you start at age 30, your retirement savings would have grown to around $726,000 by 65. And if you began contributing $100 a week when you turned 35, you'd have close to $500,000 by retirement.
How long will $1 million in a 401k last? ›
How long will $1 million in retirement savings last? In more than 20 U.S. states, a million-dollar nest egg can cover retirees' living expenses for at least 20 years, a new analysis shows. It's worth noting that most Americans are nowhere near having that much money socked away.
