How to Turn $50,000 Into $1 Million by the Time You Retire

There’s no denying $1 million isn’t the head-turning measure of wealth it used to be. The U.S. Census Bureau estimates that about one out of every 10 people living in the U.S. is worth a million bucks, if not more. Nevertheless, a $1 million retirement nest egg would be a great source of comfort for most working-class Americans.

The thing is, a seven-figure stash actually isn’t out of reach for most of us. The key is using all the time you have, and doing smart things with your seed money. In this case, “smart” just means getting into the market and leaving your investments alone for as long as you can. A modest $50,000 now could easily get you to $1 million in less than a lifetime.

Multiple paths to $1 million

Sounds impossible? It isn’t. I’ll even show you the math, in pictures. But first things first.

For the purposes of this exercise I’m going to make three key assumptions. The first of these is, you’ll be investing $50,000 into the broad market using an index fund like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), which is meant to mirror the performance of the S&P 500 index (SNPINDEX: ^GSPC). Second, let’s assume the S&P 500 continues to dish out — on average — total gains of around 10% per year that you reinvest in the same fund. Finally, let’s say you’re growing your nest egg in a tax-free account like an IRA or an annuity.

With those three factors in play, the graphic below speaks for itself. What started out as $50,000 ends a 32-year stretch as a little over $1 million. Most of this growth comes from earnings not on your originally contributed principal, but earnings on your cumulative growth. For perspective, your net gains in the final year of this projection model are nearly $96,000.

Data source: Calculator.net. Chart by author.

And to be clear, this million-dollar portfolio was founded only on a one-time investment of $50,000.

There’s clearly a “catch” — two of them, actually. One of them is, you may not have $50,000 at your disposal right now to deposit into a retirement account. The other catch is, you may not have 32 years left until you retire.

That’s OK, though. The underlying principles remain the same no matter how much or how little money you have, or how little time you have left until you reach your planned retirement. Those principles are, use the money you do have (or can come up with) as soon as you can, and be in the market for as long as you can.

Here’s an alternative scenario that may be more applicable to you. Let’s say you don’t have any major cash hoard right now, but can scrape together an extra $3,000 every year for the next 32 years. Assuming you’re achieving the average 10% gain the S&P 500 produces and reinvesting those gains in the same fund, you’ll be sitting on a stash worth something on the order of $660,000. Not bad.

Data source: Calculator.net. Chart by author.

Or, maybe you took a different route, choosing to spend several years in school or starting a business that didn’t pay off much initially, but paid off handsomely later in life. Let’s say you’ve only got 25 years before you retire, but you can comfortably contribute $10,000 every year to a retirement fund in each of these 25 years. Under this scenario, you’d end this time frame with a bit more than $1 million.

Data source: Calculator.net. Chart by author.

Again, notice how quickly your gains accelerate at the end of your saving and investing years. That’s when your new earnings on your old earnings really start to build. Under this third scenario, investment gains reached a healthy $60,000 in the 25th and final year alone, assuming the market achieved its typical 10% annual return.

Just get started

The point is, whether you’ve got a modest-sized wad of money right now, can only find a few extra bucks a year to put in retirement fund, or have to postpone investing now in exchange for bigger paychecks later, don’t think for a minute that becoming a millionaire is too far out of reach. Time is your biggest ally as an investor, so do whatever you can as soon as you can. Even a small amount now is better than nothing.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.