How to Reach $1 Million
In planning on how to get to $1 million (or any other amount), you should generally consider how much you have now, how much you can contribute in the future, how much you might earn on your investments, and how long you have to accumulate funds. But remember, there are no guarantees–even when you have a clearly defined goal. For example, the market might not perform as expected, or you may have to reduce your contributions at some point. Review your progress periodically and be prepared to make adjustments when necessary.
CURRENT BALANCE–YOUR STARTING POINT
Of course, the more that you have today, the less you may need to contribute to your investment portfolio or earn on your investments over your time horizon.
TIME (ACCUMULATION PERIOD)
In general, the longer your time horizon, the greater the opportunity you have to accumulate $1 million. If you have a sufficiently long time horizon and a sufficiently large current balance, with earnings you may be able to reach your goal without making any additional contributions. With a longer time horizon, you’ll also have more time to recover if the value of your investments drops. If additional contributions are required in order to reach your goal, the more time you’ll have to target your goal, and the less you may have to contribute.
The sooner you start making contributions, the better. If you wait too long and the time remaining to accumulate funds becomes too short, you may be unable to make the large contributions required. In such a case, you may need to consider whether you can extend the accumulation period–for example, by delaying retirement.
RATE OF RETURN (EARNINGS)
In general, the greater the rate of return (ROR) that you can earn on your investments, the more likely that you’ll reach your investment goal of $1 million. The greater the proportion of the investment portfolio that comes from earnings, the less you may need to contribute to the portfolio. Earnings can benefit from long time horizons and compound rates of return, as returns are earned on any earlier earnings.
However, higher rates of return are generally associated with greater investment risk and the possibility of investment losses. It’s important to choose investments that meet your time horizon and tolerance for risk. And be realistic in your assumptions. What rate of return is realistic given your current asset allocation and investment selection?
AMOUNT OF CONTRIBUTIONS
Of course, the more you can regularly contribute to your investment portfolio (e.g., monthly or yearly), the better your chances are of reaching your investment goal of $1 million, especially if you start contributing early and have a long time horizon.