July 1, 2022
  • July 1, 2022

How to Retire with $1 Million on a $50,000 Salary

By on March 3, 2022 0

If you’re dreaming of a seven-figure retirement nest egg but don’t think you’ll ever earn enough to make it happen, think again. A little now can become a lot later. The key is consistency and time. You have to commit to putting a steady amount of money into the market for many, many years. If you can do this, you will find that time does a lot of work for you.

With that as a backdrop, here are three different savings and investment plans that will get you to the million dollar mark on a relatively average salary of $50,000. Note that we assume an average annual return of 10% on an investment in a S&P500 ( ^GSPC -0.56% ) index fund, and also assuming that you will be willing and able to work – and earn a relatively stable income – between the ages of 25 and 65, after which you will retire.

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Three savings and investment plan scenarios

  1. Invest 36% of your income ($1,500 per month) for 20 years: Ouch! After subtracting taxes and even the most minimal living expenses, it can be difficult to scrape together $1,500 a month, or $18,000 a year, to put on the market if you’ve waited until you’re 45 to start. . That’s not to say it can’t be done; some people certainly do. For most of us though, it’s an aggressive and hopeful plan.
  2. Invest 12% of your income ($500 per month) for 30 years: Wow — what a difference just 10 years makes! By starting just a decade earlier, you can reduce your monthly needs to a third of what they would be if you waited until the last 20 years of your working life to start. That’s $6,000 a year, which is no small change on a $50,000 salary. It’s certainly doable, though.
  3. Invest 5% of your income ($200 per month) for 40 years: Again, wow. By doubling the time you invest money in the stock market, you have reduced your minimum monthly investment by more than 85% of what you would need if you waited until you were 45 to start the process.

For reference, $200 per month equals $2,400 per year. It’s still not necessarily an easy amount to find, especially if you’re just starting out in life. That’s certainly a much easier amount to come by than $1,500 a month, though…at any age.

For perspective only

These general calculations are of course only a starting point. Several other factors can affect your result. For example, is some (or all) of this money being grown in a taxable account? If it’s contributed to a tax-deferred IRA, how much will it cost you in taxes when you withdraw it?

You should also consider the odds of earning an average of 10% on your money. That’s the long-term average annual return of the entire market, but who’s to say we won’t enter a period of long-term lethargy?

Also, don’t beat yourself up if even getting to $200 a month is overkill for you right now. You will probably earn a lot more at 40 than at 25, just as you will probably earn more at 55 than at 40. . Retirement savings plans are fluid because they have to be. Even the most detailed plans of this type require regular adjustments, as does your spending and capital budget.

The three general plans above give you an idea of ​​the cost of waiting to do anything. The power of compounding – earning money from your previous investment earnings – is clear. Even if you start small, it’s better than not starting at all.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.