How to Become a Millionaire:
I heard the numbers on TV yesterday. They said you could become a millionaire by saving $15,000 a year for 25 years and earning about 8% annual interest.
Today you can put one million dollars into US Government guaranteed GNMA funds and get about $50,000 a year forever without ever touching your principal. That should be great incentive to save, even if you can only save half a million to get $25,000 a year in guaranteed income at retirement to add to your Social Security check.
I decided to run the numbers in my HP calculator to see if this was correct.
- N=25 years
- I = 8%
- Start with zero
- End with $1,000,000
My trusty HP100LX calculator says $13,679 a year will get you to a million in 25 years at 8%!
For families earning $100,000 a year, saving about $13,000 a year not out of the question. I think everyone should plan on saving 10% of their gross salary in 401K's. If you get 3% matching from your employer, then you can do it with a $100,000 annual salary. I saved nearly 20% when I was working a "regular job."
The trouble is it takes quite a bit of risk to generate 8% annual returns.
What if we can only make 6% with a conservative portfolio?
I believe the conservative core portfolio I recommend in my newsletter, with annual rebalancing, should easily make 6% a year with only 50% in the stock market and the rest in fixed income.
- N=30 years
- I = 6%
- Start with zero
- End with $1,000,000
$12,649 will do it but you have to do it for 30 years rather than 25.
I sure as heck wish they taught the "8th Wonder of the World" compound interest, and how it works in high school. I learned about it when I was 14 and have been a saver ever since.... but I won the math and science awards at my high school so it was a bit more intuitive for me than for the rest.
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DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.
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