Although millionaires are substantially more common now than they were in past decades, $1 million dollars still makes a good target for young and old investors alike.
After all, that kind of money should earn you between $20,000 and $50,000 (interest and dividends) a year for the rest of your life, and, if you live conservatively, effectively frees you from the 'rat race'.
The intriguing thing is, making a million dollars is easier than it sounds, at least on paper. The below figures are before tax and any management fees you might pay, but let's take a look:
| Starting funds of | plus $x per month | growing at | turns into | in |
| $10,000 | nothing | 10%p.a. | $1,078,266 | 47 years |
| $10,000 | nothing | 9%p.a. | $676,411 | 47 years |
| $10,000 | add $100 extra/month | 10%p.a. | $1,057,431 | 39 years |
| $10,000 | add $100 extra/month | 9%p.a. | $756,971 | 39 years |
| $25,000 | nothing | 10%p.a. | $1,100,071 | 38 years |
| $25,000 | nothing | 9%p.a. | $754,545 | 38 years |
| $25,000 | add $100 extra/month | 10%p.a. | $1,081,162 | 34 years |
| $25,000 | add $100 extra/month | 9%p.a. | $794,941 | 34 years |
Readers looking to play around with figures for themselves can find a variety of calculators at the Australian Securities and Investment Commission's MoneySmart website.
In short, $10,000 invested today will turn into a million bucks in around 47 years – with no extra money added to it – if you can achieve a growth rate of 10% per annum on average over that time.
Achieving such a return can be difficult, but is eminently doable. Readers looking for more hands-off investment options can check out Listed Investment Companies (LICs) like WAM Capital Limited (ASX: WAM), and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which have grown at more than 15% per annum on average since the late 1990s.
Alternatively, Exchange Traded Funds (ETFs) are another way to gain more passive exposure, with the ISGLCOSTP CDI 1:1 (ASX: IXI) – also known as the iShares Global Consumer Staples ETF – having returned around 9.5% per annum since inception in 2009.
By comparison, the ALL ORDINARIES (INDEXASX: ^AXAO) (ASX: XAO) index has returned around 7% per annum before dividends in the past decade.
There are several key takeaways for readers from the above figures.
- Performance matters: even a 1% difference in performance, or 1% higher fees on your superannuation or managed funds can cost you oodles of money – up to $400,000 in the examples above – over several decades
- Saving regularly makes a huge difference: just $100 extra per month can knock years off the total time to get to $1 million. Of course your $100 a month won't earn 10% per annum until you can invest it, so take these figures with a grain of salt.
- Time in the market is MUCH more important than your starting funds: Starting with $25,000 gets you to $1 million 10 years faster than $10,000, but it still takes 37 years. The sooner you start, the better.
While everyone's financial situation differs, saving $10,000 or $25,000 over several years is within the reach of most, which means the primary consideration then is to achieve the performance you need to drive your investments towards that magic $1 million dollar mark.
That's where The Motley Fool comes in, with all four of its established services beating the All Ordinaries index since inception – and for a fraction of the cost of superannuation or a managed fund. Read on to find out more!
