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Retiring as a millionaire is within anyone’s reach — especially if you start young enough and follow a simple recipe.
John Bogle, legendary founder and retired CEO of Vanguard Investments, breaks down one basic formula. 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
Funnel equal amounts of money into each fund. As they grow at different rates over time, make adjustments to keep their values roughly equal.
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 importantly, you’ll likely accumulate enough savings to retire comfortably.
How you get to $1 million
Using any number of online calculators, 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.
If you’re 40, you might have to wait until you are 75 to accumulate that seven-figure nest egg. Then again, you can play catch-up by increasing the amount you save. That works whether you are 40, 50, 60 or even older.
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.
Bogle’s 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 broke it down a couple of years ago 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.
Have you accumulated substantial retirement wealth? Share your tips for doing so by commenting below or on our Facebook page.