Over the last 20 years (1992 through 2011) we’ve had a bunch of ups and downs. HUGE ones (think tech bubble in early 2000s and the Great Recession). Despite those ups and downs the Dow Jones Industrial Average has averaged a return of 9.4% during that time, including dividends.
I know that return seems outrageously high right now, but we’re in the middle of a tough time. If I asked you what you thought the expected return would be after three years of 33% returns, you would probably not kill me for saying 9.4%, right? So let’s just go with the actual 20-year return. Here are five things that you can do now to position yourself to retire a millionaire assuming you invest the money in an account that mirrors that 9.4% return. Remember you don’t need to beat that return, just match it. A DJIA index fund would have done the trick over the last 20 years. And Dave Ramsey thinks a long-term 9.4% is low. So let’s go with the 9.4%.
So you want to slowly save a million dollars. Here’s how:
1. Max out a Roth IRA every year. A Roth IRA maximum contribution is $5,000 if you’re under 50. Approximate years until you’re a millionaire: 33.
2. Sell your car, buy a clunker and continue to make your car payment to yourself. According to Dave Ramsey, the average car payment is $475 per month. Approximate years until you’re a millionaire: 31.
3. Start now and just auto-invest $500 per month. Yes, now. Open a new window and set up an auto-withdraw from your checking to a low-fee index fund and choose to reinvest the dividends. Even if you spend every other penny you earn, but get the 9.4% return on this money, the approximate years until you’re a millionaire are just 31.
4. Max out your 401(k). I like this one a lot, especially if you have a match. It’s not the best retirement option because of higher fees and fewer investment options, but because you set this up with your employer and have it come out of your check before the direct deposit even hits your bank, it’s easy for people to set up. The annual max is $17,000. Approximate years until you’re a millionaire: 20.
5. Get a “million-dollar part-time job.” This is really fun. It’s not as “easy” as the others because it is time consuming. But the idea is to get a job working 10 hours per week doing something you love or something where you can be social and enjoy the people around you. If you can earn $100 per week doing this and invest it all automatically that’s $5,200 per year. When people ask you why you got a second job, just let them know it’s your “million-dollar part-time job.”
BONUS: Do all of these. This is tougher and takes a strong commitment from you and your family. But most of them are relatively easy, auto-pilot investments. They’re a way for you to “trick” your mind into saving more and spending less.
If you can manage to max out your 401(k) and a Roth IRA, auto-invest $500 per month, get rid of your car payment, paying yourself that amount instead, and get a million-dollar part-time job making $100 per week and invest that money with a 9.4% return (reinvesting the dividends) the approximate time until you’re a millionaire is just 13 years.
Remember, to do all of these, it’s a lot of money (you’re investing almost $40,000 per year!). But only one of these takes any significant time (the part-time job). The others are just auto-pilot and spending less. If you don’t think you can save that much try running a budget with no debt payments (other than your home) and subtract $3,000 per month from your take home pay for your “2025 Millionaire” fund. I think you’ll find that it’s pretty doable with no payments. So if you’re in debt you have to kick it into high gear and get out.
Go ahead and rip me as unrealistic for suggesting doing all of these or earning 9.4% in the comments, but don’t forget that any one of these can slowly make you a millionaire and the 9.4% is a real number…
Remember, the picture is a snail. It’s not a Ferrari. We’re talking about slow and steady savings and investing over the loooooooong term.
Until next time, put your credit card down and slowly step away from the mall!
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