For those who can start saving at a young age, a simple formula can yield a million-dollar nest egg.
Retiring as a millionaire is within anyone’s reach if they start young enough and can follow a simple recipe.
Financial writer William J. Bernstein has broken down one recipe in a 16-page e-book called “If You Can: How Millennials Can Get Rich Slowly,” which he made available free on his website.
But you don’t need to read his free book, or any book. Suggestions similar to those he makes have been made many times before by people such as John Bogle, legendary founder and retired CEO of Vanguard Investments.
Here’s how Bogle suggests you invest: It’s an asset allocation method he calls “the majesty of simplicity.” You just divide your long-term investment money into three mutual funds:
- A U.S. total stock market index fund
- An international total stock market index fund
- A U.S. total bond market index fund
You simply put equal amounts into each fund. As they grow at different rates over time, you make adjustments to keep their values roughly equal.
As for how much to invest, Bernstein suggests 15 percent of your salary. Obviously, using tax-advantaged accounts, like a 401(k) or IRA is preferable, but the key is to put aside as much as possible.
That’s it. If you can follow this simple recipe throughout your working career, you’ll likely beat most professional investors, while keeping things simple. More important, providing you invest enough, you’ll likely accumulate enough savings to retire comfortably.
How you get to $1 million
Using any number of online calculators, like this one from Bankrate, you’ll see that a 30-year-old who can save $500 monthly and earn an average of 8 percent on his or her investments can accumulate $1 million by age 65.
While 8 percent may sound high in today’s low-interest rate environment, it’s not out of the question in the stock market, particularly over time. Vanguard’s 500 Index Fund, for example, has returned an average of nearly 11 percent annually since it began in 1976.
The Bogle/Bernstein formula is one of many for accumulating wealth with a simple system. Money Talks News founder Stacy Johnson suggested a formula in his 2003 book “Money Made Simple” that incorporates not just stock and bond investments, but money market or other safe savings as well.
Here’s how he recently broke it down in “Ask Stacy: Do I Need a Financial Adviser, or Can I Manage My Money Myself?”
- Decide how much you can put into long-term savings. Long-term means money you positively won’t need for at least five years.
- Subtract your age from 100 and put that percentage of your long-term savings into a simple, unmanaged stock index fund. So if you’re 40, put 60 percent (100 minus 40) of your savings into a fund such as the Vanguard 500 Index Fund or 500 Index ETF. (I typically suggest Vanguard because they’re low cost. I have no affiliation with the company.)
- Take the remaining part of your long-term savings, 40 percent, and divide it equally. Leave half in an interest-bearing, risk-free savings account, and put the other half into a bond mutual fund, such as the Vanguard Intermediate-Term Bond Index Fund, or ETF.
You don’t need a professional financial adviser to do this. Of course, knowing what to do is the easy part. The hard part is doing it, day in and day out, for the years it takes to accumulate wealth.
However, whether you use one of these formulas or create one of your own, becoming a millionaire is within reach, especially for those willing to start young.
Check out “9 Things Beginning Investors Don’t Know But Should.”