How To Turn $6,000 Per Year Into $1 Million

Some months ago, I wrote an article on how to save $6,000 per year – not coincidentally the maximum contribution amount for Traditional and Roth IRAs for 2020 and 2021. By reframing it as a daily amount – $16.44 per day – and not a lump sum, we can contextualize how to reach a goal in a more manageable, less intimidating way. A friend of mine even put a Post-It on his desk that reads “$17 a day” to keep him on track. Today I want to explore how one could invest that $6,000 per year in the stock market and what to expect based on historical returns. In particular, I will show how a simple approach, requiring very little time, effort, or research, can turn $6,000 per year into over a million dollars.

(For details on the calculator used and market return assumptions, please see the notes at the bottom of the page.) Before we dive into the numbers, a little context: Prior to 1881, when the idea of a state-sponsored old-age insurance program was proposed by German Chancellor Otto Von Bismarck, there was no such thing as "retirement". Working class people worked until they died, and wealthy people managed estates or businesses ... until they died. The German program, approved in 1889, was the first to make retirement a possibility for average citizens. By the time the US passed the Social Security Act in 1935, the standard retirement age was set at 65. It has more or less remained there ever since, despite the decline of pensions, longer life expectancies, and higher rates of personal debt. Whether a person envisions a traditional retirement at age 65, the Financial Independence Retire Early (FIRE) lifestyle, or working into their 70s or even 80s, most people can agree that it would be nice to eventually not be obligated to work in order to survive. The truth is, though, that unless income can be replaced with a combination of Social Security, savings, and investment returns, the choice to stop working will not be available. Social Security benefits are based on an individual's work history, so the only methods for increasing benefits are to earn more and/or wait longer to receive payments. Personal saving increases by lowering expenses, increasing income, or both, but similarly does not offer a way to replace income without working or sacrificing more. Investing in the stock market, on the other hand, allows the ability for money to grow and generate income without requiring extra effort. The companies that make up the Standard & Poor's 500, Dow Jones Industrial Average, or the Russell 3000 do not require an investor's active participation to do business, and owning them – whether in an index fund or individual shares – allows one to passively benefit from successful businesses. That brings us back to our $6,000 per year in the stock market simulation. For the purposes of this article, I am using the following assumptions:

• Starting from $0 and adding $6,000 per year

• All money invested in an S&P 500 index fund

• Dividends and capital gains distributions reinvested

• Investments are held in a tax-deferred account (like a 401(k) or an IRA)

• Historical Compound Annual Growth Rate (CAGR) based on actual annual S&P returns 1989-2019 (10.61%) (For details on the calculator used and market return assumptions, please see the notes at the bottom of the page.)

Starting with no money invested, we can see below how investing in the stock market over longer and longer stretches of time can turn a manageable annual contribution into a potentially life-changing amount of money.

Year 10 Amount – $98,466.74 Principle– $60,000 Gain – $38,466.74 or 64% Year 15 Amount – $200,105.77 Principle – $90,000 Gain – $110,105.77 or 122% Year 20 Amount – $368,385.76 Principle – $120,000 Gain – $248,385.76 or 207% Year 25 Amount – $647,000.72 Principle – $150,000 Gain – $497,000.72 or 331% Year 30 Amount – $1,108,293.23 Principle – $180,000 Gain – $928,293.23 or 516%

The path to being a millionaire can be as simple as investing in an S&P 500 index fund each year for the remainder of your working life. It does not take much effort or special insight, nor does it require a tremendous amount of research or strategy. Spend some time thinking about what you would do if you were no longer obligated to work. What would you do with your time? How would your life improve? Is that life worth $17 per day? If you would like to know more or are ready to take the first step, please contact me today. “It does not matter how slowly you go as long as you do not stop.” – Confucius

Timothy Iseler

Iseler Financial, LLC | Registered Investment Advisor | Durham NC

Assumptions:

The Compound Annual Growth Rate (CAGR) of 10.61% is based on annual S&P 500 returns from 01 Jan 1989 through 31 Dec 2019 (30 years).

The projected amounts used in this article do not factor in taxes or fees. Therefore, this article assumes that investments are held in a tax-deferred account (like a 401(k) or an IRA) with no transaction fees.

Traditional retirement account contributions defer income taxes (called pre-tax) when they are made, but require income taxes to be paid when distributions are taken in retirement. Roth retirement account contributions do not defer income taxes (called post- or after-tax), and distributions are not taxed retirement.

The CAGR calculator used to determine the rate of return in this article can be found here. The compound interest calculator used to project 10, 15, 20, 25, and 30 year amounts can be found here. Past performance is not a guarantee of future returns, and all stock market investments have a risk of loss.