Years ago I read a very helpful article about financial goals and the author said that focusing arbitrarily on saving one million dollars was ridiculous. What? Isn’t that the goal of everyone who is saving and investing? Most of the financial literature we read is geared towards saving a million!
The author’s point was to actually think about what things make you happy and how much money you would need to buy or maintain those things. You then add it all up and that is your financial goal. This may only add up to $700,000 or even less if all your debt is paid off.
But I actually want to take a different approach.
Why Only One Million?
If one million is good why not shoot for more? The longer you invest and the more disciplined you are the more likely you are to reach much more than one million dollars.
And to me that makes a lot of sense. The one million dollar goal is more suited to getting you out of a job that you don’t like. That seems to be the big fad right now. But there is a better way!
Wouldn’t it be better to maintain a diligent focus on your career while also becoming an extremely successful investor? Why not become increasingly successful at work and in your investments? I think the fatal flaw for most of us is that we’re just trying to avoid hard work.
What many people fail to realize is that the harder one works the more fulfilling it can be. Yes it never gets “easy” but I look at people like Warren Buffett and others and realize that there can be jobs that are interesting late into one’s 70’s!
If someone is working for 50 to 60 years it is much more likely that they will have more than one million dollars. It’s also more likely that they begin finding greater fulfillment in their work – but that’s a different post.
Why Not Ten?
Let’s take a really simple example to see how relatively easy it is to hit the $10 million dollar mark. Consider someone who is able to contribute a total of $10,000 a year to investments. That’s a nice round number. And if this is a 401(k) with a portion coming from a company match that ends up being only $6,000 – $7,000 contributed by the person in the example – this assumes a 50% match by the company.
Let’s also assume that the $10,000 contribution increases by 2.5% every year to represent annual salary increases. That’s a pretty conservative amount in that it doesn’t include any increases for promotions.
Look at the data table below of the contribution amounts and the balance in the investment account after 45 years at an 11% return:
And here is the data in a graph:
Notice that the graph shows the account balance on the left axis and the yearly contribution on the right axis. The less exciting (but still interesting) part of this graph is that the yearly contribution amount grows to a sizeable $30,000 after 45 years. That’s pretty big and only represents 2.5% compounding annual interest.
But the power of compounding interest is shown even more dramatically in the light blue line and on the left axis. After 45 years the steady $10,000 investment grows to $14 million. That’s quite amazing considering a $10,000 annual investment is probably within reach of the average middle class family. Keep in mind this represents a much smaller investment if your company will match a portion of your savings in your 401(K). Also keep in mind that if you do this in your 401(k) you are using money that would otherwise have been paid in taxes to earn a return. (that’s a smart thing to do)
A Bit More Extreme
I want to consider another scenario. This would be someone who already has some money to invest and can be a little more aggressive in how much they can contribute to their savings each year. Let’s say they have $50,000 to invest up front and can contribute a total of $20,000 per year.
I know for most people this level of investment would be a bit of a stretch. I also know a lot of people who buy a new truck for more than $50,000 so let’s be honest – there are plenty of folks out there who could easily do this if they made some tough decisions.
So here’s the data table:
And here is the graph:
Again the contribution amount grows dramatically. But what is startling in this graph is the growth of the investment balance which goes from $50,000 to over $30 million. So why are people so fixated on one million and why aren’t there a lot more millionaires? And for that matter why aren’t there more multi-millionaires?
The answer is that most people simply lack the discipline and patience. There are certainly those who may not be aware of the power of compound interest and the advantages of using a 401(k) with a company match. But I think the vast majority of people see this and say, “yeah but I want that new truck!”
And there is really nothing wrong with that. But would you rather have the new truck now or $30 million later?
Do you have any 401(k) successes to report? How much does your company match? Are you on track to $10 million or $30 million?