How to become a Millionaire by 65, SAVE THIS MUCH PER MONTH

Summary

This video explains how much to contribute to a 401k to reach $1 million by retirement, using the power of compound interest. It breaks down examples for starting at ages 25, 35, and 45, highlighting the impact of time on growth. The earlier you start, the less you need to contribute monthly. It emphasizes the importance of staying invested, leveraging employer matches, and letting compound interest work over time. The key takeaway: start early to save less, or contribute more if starting later to still reach your financial goals.

Takeaways

• 📈 Compound interest is key to growing your investments over time, especially when starting early.
• 💹 The average annual return of the S&P 500 is 10.73%, but it's not inflation-adjusted.
• 🕰️ Time is a significant factor in investment growth; starting early allows more time for compound interest to work its magic.
• 💡 Starting at age 25, you can reach $1 million by contributing just $95 per month for 40 years with a 10.73% return.
• ⏳ If you start investing at age 35, you’ll need to contribute $215 per month for 30 years to reach the same $1 million goal.
• 🚶 Starting at age 45 means you'll need to contribute $515 per month for 20 years to reach $1 million.
• 📉 The longer you wait to start investing, the more you’ll need to contribute to make up for lost time and compound growth.
• 💰 Investing in a 401k allows you to contribute pre-tax dollars, reducing the immediate impact on your paycheck.
• 🔗 Employer matches in 401k plans can accelerate your savings by boosting your contributions.
• 🌱 The sooner you start saving, the less you need to contribute each month due to the exponential nature of compound interest.

Q & A

What is the average annual return rate of the S&P 500, according to the video?

The average annual return rate of the S&P 500, with dividends reinvested, is 10.73%. This rate is not adjusted for inflation.

How does inflation impact the value of money over time?

Inflation reduces the value of money over time. For example, $100 today might be worth around $75 in 10 years due to inflation, meaning a dollar now is always worth more than a dollar tomorrow.

What is compound interest, and why is it important for investing?

Compound interest means earning interest on both the initial principal and the interest that has been added over time. It is crucial for investing because it exponentially grows investments the longer they are left untouched.

How much does a 25-year-old need to save monthly to reach $1 million by age 65?

A 25-year-old needs to save approximately $95 per month, assuming an average return rate of 10.73%, to reach $1 million by age 65.

Why does someone who starts saving later in life need to contribute more monthly?

Starting later gives the money less time to grow through compound interest, so higher monthly contributions are needed to compensate for the shorter time frame.

How much does a 35-year-old need to save monthly to reach $1 million by age 65?

A 35-year-old needs to save about $215 per month to reach $1 million by age 65, due to having only 30 years for their investment to grow.

How much does a 45-year-old need to save monthly to reach $1 million by age 65?

A 45-year-old needs to save around $515 per month to reach $1 million by age 65, since they only have 20 years for their investment to grow.

What is the key advice for maximizing investment growth over time?

The key advice is to start investing as early as possible and stay the course. Time and consistency are essential for compound interest to work effectively.

What additional benefit does a 401(k) offer beyond regular investments?

A 401(k) offers the benefit of using pre-tax money, which reduces the immediate financial impact of contributions. Additionally, many employers offer matching contributions, further accelerating the growth of the investment.

What is the impact of employer matching on 401(k) contributions?

Employer matching can significantly boost the growth of your retirement savings. For example, if you contribute $100 and your employer matches 50%, they will add $50, making your total contribution for that month $150.