HSBE Faculty Blog: How to Become a Millionaire by the Age of 60

HSBE Faculty Blog: How to Become a Millionaire by the Age of 60
How to Become a Millionaire by the Age of 60
Posted At : October 27, 2014 9:06 AM | Posted By : Dr. David D. Cho
Related Categories: Finance
Answer: It is easier than many would think. Invest $5k every year starting at age 20. If you invest $5k every year for 40 years from age 20 to age 60, your investment will grow to $1.07 million dollars, assuming 7% average annual return. (I'll explain where the 7% return comes from at the end.)
This growth is largely due to the compounding effect of investments. Simply speaking, compounding means reinvesting the gains from the investment. I'll use the first $5k investment at age 20 as an example to show this compounding effect. If the initial $5k investment grows at an average rate
of 7% a year for 40 years, it will become $5k * (1 + 7%) ^40 = $75k, which is 15 times larger than the initial $5k investment. If you apply this calculation to the all 40 $5k annual contributions, the total $200k (= $5k * 40 yrs) investment will grow to $1.07 million, more than 5 times at the end. In
short, you only need to invest 1/5th of $1 million over time to become a millionaire.
On the other hand, if one starts investing at the age of 35, then he will need invest $15k every year to reach $1 million by the age of 60. In other words, if one starts investing at age 35 (15 years later than the above scenario), then he will have to invest 3 times the amount every year to reach
the same goal. In this case, the total required investment is $375k ($15k * 25 yrs), 88% more than the above scenario.
The million dollar question is then how do we earn 7% average annual return? The truth is there are many investment vehicles with an average annual return of 7%. But all of them come with some degree of risks. So we need to find a tool that will not only give 7% return but also has the lowest
risk. Based on several macroeconomic factors, a broad stock market portfolio investing in 3500+ stocks is likely to have 7% return. For more explanations on 7% return, see
http://www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/ In addition, this broad stock market portfolio will have the smallest risk because of the diversification effect. A simple tool to invest in 3500+ stocks is total stock market funds or ETFs,
which are becoming more popular every year. In conclusion, if you invest $5k every year for 40 years from age 20 to 60, your $200k (=$5k * 40 years) investment will grow to $1 million by the age of 60.
David D. Cho, Ph.D., is Associate Professor of Finance at the H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern University. He can be reached at
*Image courtesy of CBSlocal.com, 2014.
[email protected]; http://www.huizenga.nova.edu/Faculty.cfm/dcho