The two-step process is straightforward, but not everyone has the discipline to unlock its full potential.
Most people need to build significant retirement savings if they want to maintain their lifestyle after they stop working. Social Security provides most people with enough to meet basic needs, but not much more. For most families, any other cash requirements need to be covered by retirement accounts. The best way to 10x retirement savings in two decades is a two-pronged approach: Save regularly and invest those savings for responsible growth.
Step 1: Build consistent savings habits early
No investment strategy can overcome insufficient saving, and you can't build a retirement account without turning earnings into assets.
Consider a hypothetical retirement account with $100,000 worth of securities in its investment portfolio. If no additional contributions are made to the account, then it can only grow through investment returns. In order for that account to grow 10x to $1 million within 20 years, it would need compounding average annual returns of nearly 13%.
Image source: Author's calculations.
It is not reasonable to expect this sort of performance in your retirement account. This would require your allocation to significantly outpace the market as a whole year after year. Even the most accomplished active investors fall short of this performance, and it's not wise for amateur investors to rely on that sort of exceptional performance.
Even if you could devise a world-class strategy that crushes market index returns, you'll still have to deal with shifting portfolio allocation as you approach retirement. As the investment time horizon gets shorter, it's standard practice to increase bond exposure in your retirement account to lock in long-term gains and reduce volatility. This removes the risk that a bear market will wipe out your savings, but it also reduces your investment growth potential.
Image source: Getty Images.
If you can contribute $15,000 to that hypothetical retirement account referenced above, then you'll only need an 8% annual rate of return to surpass $1 million in 20 years. That's very achievable, based on historical market performance.
Image source: Author's calculations.
Investment growth is powerful, but there are limitations to its realistic potential.
That's why it's so important to make consistent retirement account contributions. Financial planners generally recommend that households strive to retain 15% to 20% of annual earnings if they want to effectively meet their retirement goals. Not all of those savings have to be directed to retirement accounts -- it's fine to build other assets, such as home equity. However, retirement should still be a high priority in your financial plan.
A 15% to 20% savings rate isn't always feasible, and it's OK if there are times when you fall short of that goal due to unexpected circ*mstances. It's still vital that your financial plan reflects that long-term savings goal and that you are making up for lean times during periods when you have extra cash flow. To maximize retirement savings, make sure that you're using all the resources available to you. Take full advantage of employer 401(k) matching programs if they're offered to you. Use a health savings account (HSA) if you're eligible.
Step 2: Invest for growth
If you're saving the right amount, then a good investment strategy should be more than enough to deliver 10x asset growth. In your earlier working years, your retirement account has the longest possible time horizon -- those funds won't be accessed for multiple decades. That makes short-term volatility and market cycles functionally irrelevant, because you shouldn't have to access those funds and sell stocks when they're down.
A long time horizon allows you to allocate aggressively toward equities and growth assets to maximize returns. You can worry about managing volatility later down the road when it's advantageous to do so. In the meantime, build a balanced equity portfolio with relatively heavy growth stock exposure to maximize long-term returns.
Consider the hypothetical retirement account from before. If it was invested too conservatively and returned only 4% annually, then it wouldn't even grow to $650,000 over 20 years, even with $15,000 being contributed each year.
Image source: Author's calculations.
Don't take unwise risks with your retirement savings, but don't be scared to exchange volatility for growth. A properly diversified portfolio of equities might go through ups and downs over the years, but it should provide plenty of long-term upside. As long as you don't sell when the market is down, history tells us that the market will eventually recover and deliver returns for shareholders.
FAQs
The best way to 10x retirement savings in two decades is a two-pronged approach: Save regularly and invest those savings for responsible growth.
- Step 1: Build consistent savings habits early. ...
- Step 2: Invest for growth.
This rule suggests that aiming to save at least 10 times your annual income by the time you reach retirement age is a prudent path to ensuring a comfortable retirement. While this guideline offers a clear target, it also sparks curiosity and debate.
Will $1 million be enough to retire in 20 years? ›
How long will $1 million in retirement savings last? In more than 20 U.S. states, a million-dollar nest egg can cover retirees' living expenses for at least 20 years, a new analysis shows. It's worth noting that most Americans are nowhere near having that much money socked away.
How to save $1,000,000 in 20 years? ›
Given an average 10% rate of return on the S&P 500, you need to save about $1,400 per month in order to save up $1 million over 20 years. That's a lot of money, but the good news is that changing the variables even a little bit can make a big difference.
How to turn $10,000 into $100,000 fast? ›
Effective strategies include buying and scaling an established online business, investing in real estate through crowdfunding, flipping products or websites, and diversifying investments across stocks, mutual funds, and more speculative ventures like cryptocurrencies.
What happens if you invest $1,000 a month for 20 years? ›
Investing $1,000 a month for 20 years would leave you with around $687,306. The specific amount you end up with depends on your returns -- the S&P 500 has averaged 10% returns over the last 50 years. The more you invest (and the earlier), the more you can take advantage of compound growth.
How long should $500,000 last in retirement? ›
If you retire with $500k in assets, the 4% rule says that you should be able to withdraw $20,000 per year for a 30-year (or longer) retirement. So, if you retire at 60, the money should ideally last through age 90. If 4% sounds too low to you, remember that you'll take an income that increases with inflation.
What is the $1000 a month rule for retirement? ›
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
How long will $800 K last in retirement? ›
Can you retire at 50 with $800k? It is certainly possible to retire by age 50 with $800,000 in the bank, but you would need to adopt a relatively frugal lifestyle. Using the 4% safe withdrawal rule, you could take out $32,000 per year, or $2,667 monthly. This should sustain you for 25 years until age 75.
How many people have $1,000,000 in retirement savings? ›
If you have more than $1 million saved in retirement accounts, you are in the top 3% of retirees. According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
How many people have $3,000,000 in savings in the USA? There are estimated to be a little over 8 million households in the US with a net worth of $3 million or more.
What percentage of retirees have a million dollars? ›
Putting that much aside could make it easier to live your preferred lifestyle when you retire, without having to worry about running short of money. However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.
Can I live off interest on a million dollars? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
How much will $50,000 be worth in 20 years? ›
Assuming an annual return rate of 7%, investing $50,000 for 20 years can lead to a substantial increase in wealth. If you invest the money in a diversified portfolio of stocks, bonds, and other securities, you could potentially earn a return of $159,411.11 after 20 years.
How to turn $10,000 into $20,000 quickly? ›
Here are some ways to flip $10,000 fast:
- Flip items (buy low, sell high)
- Start a blog.
- Start an online business.
- Write an email newsletter.
- Create online courses or teach online.
- Invest in real estate with EquityMultiple.
Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.
How long does it take to 10x your money? ›
A one-time investment can more than 10x in value in 25 years averaging 10% annual returns, thanks to compounding. Most people won't bank on a one-time investment to set them up in retirement, but it shows the heavy lifting that time can do.
