Answer: $160 contributed monthly
Questions:
- How does $160/month over 40 years (which is a total of $1,014,810.38) become over $1 million?(Hint: think about compounding)
- Do you think that you will invest at least $160/month? Less? More? Why or why not?
- Now that you have seen the power of compounding, when would you recommend someone start investing?
Click here for the ready-to-go slides for this Question of the Day that you can use in your classroom!
Behind the Numbers (Investor.gov):
It has become increasingly important for students to understand investing since they will be responsible for their own retirement. I also like this question because it demonstrates the power of compound interest and consistently adding to your investments.
So, first have students estimate how much they need to save monthly over a 40 year period to have a future value of $1 million at the end of the period. Tell them to assume their stock market investments earn a return of 10.65% (which is the geometric average from 1970-2020 for the S&P500, according todata compiled by NYU) and that the amount they contribute every month remains constant.
Once they have each written down their guesses, you can project thisinvestment calculatoron the screen. Youmight start by putting some of your student guesses into the calculator before arriving at the correct number of $160.
To show the power of compound interest, you can have students calculate how much they needed to contribute in order to create this future value of over $1,000,000. Multiplying 480 (40 years) payments by $160 equals $76,800. So in this case, the impact of compounding has almost a 13X multiplier effect:$76,800 was contributed to create a final future value over $1,000,000.
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For more information on compound interest, check out the NGPF Math Collection and look under the Exponential Equations section!
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About the Author
Mason Butts
After graduating from UCLA with a Master's in Education, Mason spent 5 years as a science educator in a South Los Angeles public high school. He is committed to supporting the holistic growth of all students and empowering them to live a life of relational, academic, and financial success. Now settled in the Bay Area, Mason enjoys facilitating professional developments and partnering with educators as they prepare students for a bright financial future. When Mason is not building curriculum or planning a training, he can be found cycling, trying new foods, and exploring the outdoors.
FAQs
That means if you plan to retire in 20 years, you might need an extra $800,000 in your nest egg to live the kind of lifestyle $1 million would buy you in retirement now. That's why you should invest 15% of your gross income into good growth stock mutual funds.
How much should I save a month to reach 1 million? ›
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
What is the average 401k balance for a 65 year old? ›
What a $1 million retirement really looks like? ›
A $1 million retirement account gives you around $40,000 per year for the first few years of your retirement. Once Social Security kicks in, this will give you on average anywhere from $65,000 to $95,000 per year depending on your lifetime earnings and when you began collecting benefits.
How much money do most people retire with? ›
The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances. Taken on their own, those numbers aren't incredibly helpful. There are a variety of decent retirement savings benchmarks out there, but how much money other people have isn't one of them.
How long will $1 million last in retirement by state? ›
For instance, in California, an average retiree requires approximately $100,965 to lead a comfortable life, whereas in Kansas, that figure is just above $63,000. Retirees in certain states can enjoy between 15 and 16 years of life if they save one million dollars.
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.
What percentage of retirees have $3 million dollars? ›
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 much monthly income will 1 million generate? ›
At the current Treasury rate of 4.3%, a $1 million portfolio would generate about $43,000 per year, or roughly $3,500 per month. With your Social Security payments that would generate about $6,000, again enough to live comfortably in most places.
At what age is 401k withdrawal tax free? ›
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.
Can I retire on 500k plus Social Security? ›
The short answer is yes, $500,000 is enough for many retirees. The question is how that will work out for you. With an income source like Social Security, modes spending, and a bit of good luck, this is feasible. And when two people in your household get Social Security or pension income, it's even easier.
Do most retirees have a million dollars? ›
In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved. If you're looking to be in the minority but aren't sure how to get started on that savings goal, consider working with a financial advisor. What Does the Average Retiree Have Saved?
How many people have $3,000,000 in savings in usa? ›
1,821,745 Households in the United States Have Investment Portfolios Worth $3,000,000 or More.
What is the best state to retire in 2024? ›
Florida is the No. 1 state to retire in 2024—No. 2 is nearly 2,000 miles away
- Affordability, which considered factors such as cost of living and tax benefits.
- Quality of life, which looked at metrics like weather and the share of the state's population over the age of 65.
A recent analysis determined that a $1 million retirement nest egg may only last about 20 years depending on what state you live in. Based on this, if you retire at age 65 and live until you turn 84, $1 million will probably be enough retirement savings for you.
Can you retire $1.5 million comfortably? ›
The 4% rule suggests that a $1.5 million portfolio will provide for at least 30 years approximately $60,000 a year before taxes for you to live on in retirement. If you take more than this from your nest egg, it may run short; if you take less or your investments earn more, it may provide somewhat more income.
Can you live off $1 million dollars interest? ›
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.
Can I retire at 55 with $1 million? ›
Summary. $1 million should be enough to see you through your retirement. If you choose to retire early, you may need additional savings and amend your desired retirement lifestyle to live a little more frugally.
