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Can 1 Year Make You a Millionaire?


By Chuck Saletta, The Motley Fool

One million dollars is a lot of money. It's around four times as much as the typical household nearing or in retirement is worth, which makes it a great target to attempt to achieve. One of the big challenges most people have with reaching that target, however, is that typical strategies to save up that cool million involve saving a bit each month for decades to get there.

What if there were another way? What if, instead of scrimping and saving for years, you could just make one huge sacrifice to save throughout the course of a single year and simply let that money compound? Could that be enough? Could one-year's worth of sacrifice really be all it takes to make you a millionaire?

It's possible, but...

The table below shows how many years it takes for a single one-time investment to grow into $1 million, based on the amount you invest and the average annualized rate of return you earn on it:

ONE-TIME INVESTMENT
10% ANNUAL RETURNS
8% ANNUAL RETURNS
6% ANNUAL RETURNS
4% ANNUAL RETURNS
$66,000
28.5
35.3
46.6
69.3
$51,000
31.2
38.7
51.1
75.9
$33,000
35.8
44.3
58.5
87.0
$25,500
38.5
47.7
63.0
93.5
$19,500
41.3
51.2
67.6
100.4
$6,000
53.7
66.5
87.8
130.4

Over the long haul, the stock market has delivered returns near that 10% annualized level. If that trend continues into the future, it's within the realm of possibility that a person or a couple who sacrifices tremendously for one year could wind up retiring as a millionaire just from that one-year's savings. Even if it's possible, however, it's still risky.

One risk you face is that if you make that giant investment all at once, you're presuming that the market will perform near its average level from the day you invested to the day you withdrew it all. That doesn't always work. For instance, while making regular investments helped people make a bit of money during one of the worst decades in the market's history, those who invested big at the beginning of the decade didn't fare well at all.

Another risk you face is that if you're investing a little bit at a time, it's fairly straightforward and relatively painless to adjust your investment by a bit if you find yourself falling behind your target. On the flip side, if you invest a single giant slug of cash, by the time you recognize your plans are truly off course, you may not be able to afford the size of the investment it would take to catch up.

After all, look how the difference can be measured in decades if you really end up earning 4% to 6% instead of the market's long-term historical returns near 10%. If you run into trouble because you were relying on that one single investment to pull you through, it simply gets crazy difficult and expensive to catch back up if you fall behind.


About those investment amounts

Piggy bank with a combination lock and nest eggs that say IRA and 401K sitting on top of 20 dollar bills.

The investment amounts in that table above weren't pulled out of thin air. They represent the amounts that households may be able to invest in their 401(k) and/or IRA plans, based on their ages and marital status. Those types of retirement plans represent the cornerstones of most people's long-term investments.

A single person under age 50 may be able to contribute as much as $19,500 to an IRA, while a person age 50-plus gets a catch-up contribution that brings that limit to $26,000. In addition, a single person under age 50 may be able to contribute as much as $6,000 to an IRA, while a person age 50-plus gets a catch-up contribution that brings that limit to $7,000. If you're married, those limits apply to each person in the couple, though each needs access to his or her own 401(k) through work to contribute to that plan.

Based on various combinations of marital status, age, and job coverage, the table below shows where those dollar amounts in the first table came from:
AMOUNT
MEANING
$66,000
Married couple, age 50-plus, both maxing out their 401(k)s and IRAs
$51,000
Married couple, under age 50, both maxing out their 401(k)s and IRAs
$33,000
Single person, age 50+, maxing out a 401(k) and IRA
$25,500
Single person, under age 50, maxing out a 401(k) and IRA
$19,500
Single person, under age 50, maxing out a 401(k)
$6,000
Single person, under age 50, maxing out an IRA

Table by Author.

Can you make the sacrifice?

Regardless of whether you choose to invest a little bit each paycheck or dig deep for one year, reaching a $1 million nest egg takes sacrifice. Still, it's a goal that may very well be within your reach -- if you're willing and able to put aside money today and invest it in the hope of an even brighter future.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

See more at The Motley Fool

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