To the new graduates of the class of 2015: Congratulations on your tremendous accomplishment. As you start your life and career, know that a world of opportunity awaits you. You have a future in front of you that your older soon-to-be-coworkers can only dream of.
One such opportunity available to you is your once-in-a-lifetime shot at setting yourself up to become a multimillionaire by the time you retire. Unfortunately, the chance is only available for a limited time, and the longer you wait to claim your chance at earning that elusive status, the tougher it will be for you to get there.
Why You Have This Chance at $2 Million or More
The key reason a $2 million nest egg may be within your reach is because you have three key advantages your older co-workers don’t have.
Advantage No. 1: Your age. The younger you are, the more time your money has to grow before you retire. One rule-of-thumb guideline in investing is known as the Rule of 72. To use it, you divide 72 by the rate of return you anticipate earning on your investments, and the result is the approximate number of years it will take for your money to double.
Over the long run, the stock market has returned a bit more than 9 percent in annualized returns. If that keeps up, the Rule of 72 indicates that money you invest in stocks could double about once every eight years. If you’ve got a 40-year career ahead of you, your money can potentially double five times. As a result, every $1,000 you put away this year can potentially be worth $32,000 at retirement.
That advantage rapidly diminishes, however. If you wait a few years to “establish yourself” before you start investing, you’ll lose one or more of those doubling periods. Miss just a single doubling period, and that $32,000 for each $1,000 invested becomes $16,000 instead.
Advantage No. 2: Your lifestyle. As you’re just preparing to start out in life, you likely have few of the “trappings of success” that may have afflicted your more established coworkers. Indeed, if you’re used to living like a broke college student, continuing a similar lifestyle once you find yourself gainfully employed is one of the best tools you have to reach multimillionaire status.
Consider college-like choices such as living with a roommate, driving a reliable used car or taking public transit, buying food in bulk and getting creative with leftovers, and shunning small luxuries like cable TV. On top of that, you can better stretch your paycheck by doing things like keeping your wardrobe simple (but appropriate for your chosen career) and sticking to a limited budget for “office networking” activities.
Because you’re just starting out, aside from potential student loans, you likely don’t have high embedded lifestyle costs that, once you start getting used to them, can be surprisingly hard to get rid of. Keep your lifestyle costs as close to that “broke college student” state as you can for as long as you can, and you’ll be surprised at how much easier it will be to find money available to invest for your future.
Advantage No. 3: Your health and vitality. Generally speaking, as we humans age, our health care costs increase. The younger you are, the less likely you are to have a serious and expensive health condition. That helps you in two ways. For one, the healthier you are, the less you’re spending directly on health care. Also, the healthier you are, the more likely you are to be able to either work extra hours at your job or at a second job to come up with some spare cash to invest.
Leverage Your Advantages for Your $2 Million Opportunity
Those three key advantages give you the opportunity to become a multimillionaire, but only if you put them to work for you. The table below shows how much you have to invest each month to wind up with $2 million, depending on how long you invest and what rate of return you earn:
|Years||10% Annual Returns||8% Annual Returns||6% Annual Returns||4% Annual Returns|
By starting as a young professional just out of college and investing for long-run stock market potential returns, just a few hundred dollars per month can get you to multimillionaire status at retirement. But notice how much substantially more expensive that gets the longer you wait. If you think it’s tough coming up with $300 a month as a new hire, think how tough it will be to go from $0 to $1,500-plus per month as a mid-career professional who didn’t leverage those advantages.
The market provides no guarantees, of course, but all else equal, the sooner you get started, the less you have to put away each month and overall to reach your goal.
You Don’t Have to Go It Alone
Perhaps best of all, you are very likely to be able to get help coming up with the money to invest, from your boss and Uncle Sam. If your job offers a 401(k), 403(b), TSP or similar qualified retirement plan, you can contribute up to $18,000 a year to that plan if you’re under age 50.
In a traditional style plan, you contribute pre-tax dollars, which means Uncle Sam covers part of the cost through you having less money subject to income taxes. In a Roth style plan, you pay taxes on your contributions, but you can potentially withdraw your money tax-free in retirement. In either case, your money grows tax-deferred while in the plan.
On top of those advantages, if your employer offers a matching contribution, that’s additional money going toward your plan that doesn’t come out of your pocket. Between the match and the tax break, you can potentially double the money going toward your investments when compared to what it costs you out of pocket.
Regardless of whether your boss offers such a plan, if you have earned income, if you’re under age 50 you can contribute up to $5,500 a year to an IRA. IRAs likewise come in both traditional and Roth varieties, with the traditional offering a potential tax deduction for your contribution and the Roth offering the potential of tax-free withdrawals in retirement. Both styles offer tax deferrals while your money remains in the plan, compounding on your behalf.
Between Uncle Sam and your boss, you can get some serious help reaching your savings goals. The dollars in the table above don’t care whether they came from your pocket, your boss’s or Uncle Sam’s. As long as they find their way to your account, they can be put to work for you.
Class of 2015: Get Started Now
As a young adult graduating as a member of the class of 2015, you have a tremendous opportunity to become a multimillionaire. The sooner you get started, and the more consistently you invest toward that goal, the better your chances are of reaching it successfully. The longer you wait, the tougher and more expensive it will be for you to turn that goal into your reality.
If you can’t invest your full targeted amount on your entry-level salary, don’t despair. Invest what you can, and work your way up to your target over time as your salary increases and you figure out how to trim costs from your budget. No matter what your starting state, one of the most important steps you can take is to get started now, to put time and your other advantages firmly on your side.