For as long as I can remember, I've wanted to be a millionaire.
Maybe it was the Richie Rich cartoons when I was a kid, or the appeal of the lotto jackpot that offered a million-dollar prize.
I also wanted to be Alex P. Keaton (played by Michael J. Fox) from Family Ties. I think that was mostly because he had a desk chair on wheels. I'm happy to say I've achieved that particular goal! Looking back, maybe I was always destined to be an investment advisor!
As I got older, the desire for $1 million remained, but my rationale changed.
From wanting to be 'rich', my perspective changed. I wanted to be independently wealthy — that is, wealthy enough that I could sustain my standard of living without needing to work.
Now, while $2 million would be wonderful and $5 million would be champagne and caviar, $1 million is my benchmark. And it's well within my reach.
Try Earning $75,000 Per Year From A Term Deposit!
It's true that $1 million isn't as much as it used to be — and certainly less impressive an amount than when I was watching those cartoons as a schoolboy. But it's a large sum, and would be life-changing.
For instance, $1 million invested in shares could comfortably earn between 5% and 5.5% in dividends each year. Let's take the midpoint of 5.25%.
If tax-effective income was your aim, it'd be possible to only select fully-franked shares. Grossing up those dividends would take our 5.25% to a pre-tax 7.5% yield.
That's $75,000 per year in taxable income. Try getting that from a term deposit!
Of course, quality companies will also likely grow profits over time, too — and that should be reflected in both a growing stream of dividends and a growing share price!
Want to earn $100,000 per annum? You'll need $1.33 million if you get the same dividend yield. If you're content with $60,000 per year, you'll only need $800,000 in invested assets.
But What About GFC II?
It's worth stopping at this point to consider a GFC-type event.
While share prices might decline by 30% or even 40%, well-chosen companies with strong, healthy dividends and unstretched balance sheets should be able to maintain the vast bulk, if not all, of those dividends. It's yet another reason to stop focussing on day-to-day share prices!
Okay, so let's assume I have you convinced that a 5.25%, fully-franked dividend is achievable. (It is.)
The question remains how to amass the sort of lump sum required to generate those dividends.
The Genius of Compounding
That's where the beauty of compounding comes to the fore. Albert Einstein may (or may not) have called it the 8th wonder of the world. If he didn't he really should have.
When people say "the first million is the hardest", it sounds ridiculous, given most people will never have $1 million in the first place. But it's a perfect example of compounding at work.
If you have $100 and it grows at 10%, you'll end up with $110. But if you have $1 million, that same 10% will turn it into $1.1 million. You can see how much easier it is for $1 million to become $2 million than for $100 to become even $1,000.
But don't let that put you off. Regular saving and thoughtful investing can propel you to a seven-figure nest-egg faster than you might imagine.
Now, when it comes to investing, there is absolutely no substitute for time. If you are under 25 and reading this, congratulations. Getting to $1 million is going to be incredibly easy with just a little effort.
The Biggest Favour You Can Ever Do…
If you're over 25 but you know someone who is under 25, please do them the biggest favour you can, and send this email to them. Perhaps more than almost anything almost else, if they read the rest of this email, it will permanently change their lives for the better.
But if you're 30, 40, 50 or even 60, it's not too late. Sure, the older you are, the more discipline and sacrifice it will take, but the alternative is to do nothing and end up struggling.
Let's say you can earn something around the market's historical average. Index fund manager Vanguard has produced a report suggesting the ASX has averaged a compound 12% per year over the last 30 years. (That includes the 1987 crash and the GFC, by the way — almost a one-sentence justification for long-term investing in shares all by itself!)
But let's be conservative, and use just 9% as our average return. (We'll also ignore taxes and brokerage commissions for these examples, too.)
Starting from scratch — zero to $1 million
If you're currently 25, you can save just $3,000 per year until you're 65, and end up with over $1 million when you retire. Not bad for just $250 per month!
If you're 40, you'll need to save $1,000 per month, but that gives you a cool $1 million on your 65th birthday.
Now, it gets tougher to create a seven-figure fortune if you're over 40 and starting from scratch. If you're 50, you'll need to save $2,000 each month, and work until you're 68.5, but the extra few years of work might be worth it if you can retire with a cool $1 million in shares.
One step ahead — starting with a nest egg
But what if you can start with something behind you?
If you've already managed to save, say, $50,000, that shaves 10 years off the process for the 25 year-old, 3.5 years for the 40-year old and a couple of years if you're 50.
The real value starts to be apparent if you can lift that average return. Of course, wishing doesn't make it so, but if you can increase your annual return by investing better, there are real gains on offer.
While the 40 year-old takes 25 years to get to $1 million by investing $1,000 per month at 9%, she can get there in only 23.5 years at 10%, 22.5 years at 11% and 21.5 years at 12% per annum, annualised.
Put another way, by 65, that nest egg would be worth $1.02 million at 9%, $1.18m at 10%, $1.37m at 11% and a full $1.6m at 12%. That extra $600,000 would give you an additional $45,000 per year pre-tax at our 7.5% grossed-up yield!
My 5 Steps to $1 million
If the numbers have made your head spin, don't worry too much — while a trusty calculator (or Excel spreadsheet) can do them for you, here are the key points:
1. It's never too late to start.
2. Notwithstanding point 1, above, if you haven't started… do it. Now.
3. The more you save each month, the better off you'll be.
4. The better the return on your investments, the better off you'll be.
5. The longer you wait to access it, the better off you'll be.
Your 4 Step To Do List:
1. If you haven't yet started investing, open an online brokerage account. Today. Seriously.
2. If you've started and you can afford to, increase your monthly savings into that account.
3. If you can't afford to, ask yourself: 'Is there really nothing I can stop spending my money on, if it means being able to retire better'?
4. Whether you're 17 or 75, start (or keep) investing better.
Simple. Foolish. Profit.
We're not really ones for bells and whistles here at Motley Fool Share Advisor. Some people (mistakenly, in our opinion) equate complexity with superior returns.
Try telling that to the geniuses who were trading CDOs when the GFC hit and leveraged gold ETFs when gold was at $1,800/oz! (Perhaps there might be a little correlation between three-letter acronyms and disaster, though!)
We try to keep it simple. At Motley Fool Share Advisor we offer a positive, time-honoured, investing approach — finding great businesses at attractive prices.
We think, with a little guidance and education, you are the best person to control your finances.
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