Dakota State University
Madison, SD, USA
How to Retire as a Millionaire
The Miracle of Compounding
Invest money in a tax-deferred IRA devoted to a well-diversified portfolio of common
stocks.
In the long run the stock market has returned about 10% annually.
In the 1990s the stock market did considerably better than that.
Assume retirement on your 65th birthday.
Here are some ways to retire as a millionaire.
Person A
Assume some wise parents are watching our for your best interest.
On the day you are born $2,039.27345 is placed into the IRA for your benefit.
When you retire at age 65 it will have grown to be $1,000,000.
(If you put the same amount of money into your IRA each birthday, the total will be
$10,979,607.27.)
Person B
Assume your parents don't have that much money.
Starting on the day you were born and on every birthday thereafter place $185.73280 into
the IRA.
When you retire at age 65 the annuity will have grown to be $1,000,000.
Person C
Okay, assume you didn't learn about compounding until college.
Starting on your 22nd birthday, place $1,532.23650 into the IRA on every birthday.
When you retire at age 65 the annuity will have grown to be $1,000,000.
Person D
Assume you are older but finally wiser.
Starting on your 40th birthday, place $9,159.03855 into the IRA on every birthday.
When you retire at age 65 the annuity will have grown to be $1,000,000.
How important is the interest rate?
Very. Consider the following table which shows the amount to which $1 will compound in 65 years.
Amount Invested at t=0 |
Interest Rate |
Future Value in 65 Years, at t=65 |
$1 |
1% |
$1.91 |
$1 |
5% |
$23.84 |
$1 |
10% |
$490.37 |
$1 |
11% |
$883.07 |
So, squeezing just another percent out of your stock market returns over the 65 years will add substantially to your retirement nest egg.
If you would like to see the detailed calculations (or if you would like to play what-if), display or download the following Excel file: [How to Retire as a Millionaire]
See Personal Finance for more ideas, including information on IRAs and Roth IRAs.
College of Business & Information Systems
Dakota State University
Madison, SD 57042
Site Manager: Jim Janke
Contact at: jim.janke@dsu.edu
http://www.courses.dsu.edu/finance/retire.htm
August 2, 2000