Most people in the trades, like me, didn’t pick construction as a career because we thought we’d make millions. No doubt, a small percentage has. But most of us choose construction because we want to build, to work with our hands, to work with tools, to not have to wear a suit, and, maybe, to be our own boss. Still, I bet we all desire to retire with a million bucks.
We all know a million dollars isn’t what it used to be. Also know this: Only 3% of the U.S. population has $1 million in liquid assets. That’s rather rarefied air. About 12% of all U.S. households have a net worth of $1 million. Household net worth includes all members of a household and their combined assets, including primary residence, retirement accounts, investment real estate, and savings. So, retiring with a million dollars in your retirement account is a major accomplishment.
Here’s one way to accumulate $1 million in your retirement account: Contribute $350 a month for 45 years (total investment will be $189,000). If you average a 6.5% return on your investment, compounded annually, in 45 years, you will have $1,034,563. (If your investment can compound quarterly, add another $76,900.)
You’ll need the passion to build financial security and the discipline to make a monthly contribution.
Wow, maybe not so daunting. Are you motivated? You’ll need the same passion, discipline, and commitment required on the jobsite to pull it off. You’ll need the passion to build financial security, the discipline to make a monthly contribution, the priority to change your family’s fortunes, and the commitment to build wealth rather than spend conspicuously. Trust me, 45 years passes in a heartbeat.
The Significance of Time
Time to compound an investment, without question, is the main ingredient for success. The more time you have, the more money you can accumulate.
For those of you with less than 45 years to invest, fret not. Saving for retirement is a worthy goal and should be pursued regardless of time. But to understand the significance of time, let’s compare 45, 30, and 22.5 years of saving $350 monthly at an annual rate of 6.5%, compounded annually:
- In 45 years, an investment of $189,000 grows to $1,034,563.
- In 30 years, an investment of $126,000 grows to $362,774.
- In 22.5 years, an investment of $94,500 grows to $201,888.
If you have less than 45 years to invest—and assuming you’re older, more established, and making more money—you can up your monthly contribution and take advantage of compounding a greater amount for a shorter period. (See the compound interest calculator at www.investor.gov.)
The longer your money can compound interest, the greater the return. In the examples above, the difference between 30 years and 45 years is 15 years in time, $63,000 in investment, and $545,600 in returns—significantly more than the $236,774 earned over the first 30 years. (To calculate returns, subtract the investment dollars from the balance for the time period you are looking at.)
Simply put, compounding means that when you make a profit on your original investment—perhaps through interest or stock appreciation—the total of the original investment and profit produces a larger investment base that then grows at an accelerated, or exponential, rate. Albert Einstein said it best: “Compounding interest is the 8th wonder of the universe. He who understands it, earns it; he who doesn’t, pays it.” Folks willing to save and invest for 45 years “understand it.” So, wait no longer: Start a retirement account today and start compounding tomorrow, because time waits for no one.
Investment Vehicle
Another ingredient for accomplishing our goal of retiring with a nice chunk of change is having a tax-free investment vehicle in which to take the 45-year ride. A tax-free retirement account allows you to maximize your investment base. Because it is tax free, it gives you a larger sum of money to compound each year, maximizing your annual growth.
Roth 401(k). If you work for a company and it has a Roth 401(k) available with a percentage match, then that should be your tax-free retirement account. The most common company “match” is 50% of up to 6% of salary. That match gets you to your retirement goal faster and yields its own returns over 45 years. Needless to say, you should try to maximize your company’s match—all 6%—if it doesn’t create a monthly financial hardship. If you make $50,000 a year, the company will match half of your first $3,000 in contributions dollar for dollar. If you contribute $350 a month for the year ($4,200), at the end of the year, your total investment will be $5,700—nice. The maximum allowable employee contribution to a 401(k) for 2025 is $23,500.
Roth IRA. If you do not have access to a 401(k) fund, or you’re self-employed and you want to keep it simple, stick to a Roth IRA. A Roth IRA allows annual contributions of up to $7,000 if you’re under 50 years old. If you’re 50 or over, the IRS allows for an additional $1,000 “catchup contribution,” for a total contribution of $8,000. The $7,000 contribution limit is well above the $4,200 set as our goal and offers room to increase the monthly contribution if you have extra funds. Because Roth IRAs are funded with after-tax dollars, all retirement withdrawals are tax free.
The IRS sets income requirements for contributing to a Roth IRA. Modified adjusted gross income must be $165,000 or less for single filers and $246,000 or less for a married couple filing jointly. If you can contribute more than $7,000 a year to retirement and you’re married, your family can open a spousal Roth IRA and contribute another $7,000 to annual IRA savings.
A spousal IRA allows a nonworking spouse with little or no income to open an IRA based on household income, not their individual income. A spousal IRA can increase your household retirement contributions to $14,000 or $16,000 a year, depending on age. The disadvantage of opening a spousal IRA is that it wouldn’t add to the original Roth IRA and enlarge its investment base for compounding. It would be creating a new investment.
Other IRA options not discussed here allow for larger annual contributions, but they are more complicated to start. (If interested, others are discussed in “The Future Is Now: Making Retirement Savings Work,” Mar/2021.)
Investments
Once you open a Roth IRA or 401(k), you have to decide what to invest in. Investments run the gamut from certificates of deposit (CDs) to bonds, stocks, real estate, commodities, and crypto, to name a few. Some, like CDs, are low risk; some, like commodities and crypto, are high risk; and some, like real estate, require large amounts of money and are less liquid.
The challenge is to achieve a 6.5% return on your investment and balance risk, reward, and peace of mind. Stocks (ownership) in the companies that drive the U.S. economy offer your best shot at achieving a 6.5% return while balancing risk and reward over a 45-year period. Yes, investing in the stock market is risky and is often described as riding a roller coaster where some years your investment is up and some years your investment is down. However, achieving an average 6.5% annual return over a 45-year period requires a more aggressive investment profile than CDs or bonds. Stocks have averaged a 10% return over the last 100 years and the S&P 500 (an index of 500 stocks) has returned 15.88% over the last 12 months (at the time of this writing). Treasury bonds have averaged 5% over the same 100-year period, and the 10-year U.S. Treasury Bond is currently yielding 4.05%. Certificates of deposit are presently paying a 3.5% yield for 12 months. For me, commodities and crypto are way too risky (remember, we’re keeping it simple).
The “rule of 72” helps clarify what these percentages mean in real terms: Divide 72 by the interest rate (expressed as a whole number) on a particular investment to find the number of years it takes to double your money. At a 10% rate, it will take 7.2 years to double; at 3.5%, 20.5 years.
Two investment tools that balance the risks and rewards associated with purchasing stocks are diversification and dollar cost averaging.
Diversification means investing in a variety of companies so no single company’s failure dooms your future. The best way to invest in a variety of companies is to invest in an S&P 500 low-fee exchange traded fund (ETF).
By using the dollar cost averaging method over 45 years to invest monthly in an S&P 500 ETF, you are at times buying when the stock market is high and at times buying when it is low. You must be disciplined and not panic when markets are tanking; that’s when your fund is buying low, at a discount, and balancing risk over the long haul.
Investing, for many of us, is emotional, so watching your investment ebb and flow is dangerous. I have seen many a friend sell an investment just days before it hits its low. I suggest you “do no harm” and stay the course. Take pleasure when markets are selling off knowing that you are buying at a discount. Stay committed and make the monthly contribution in spite of the headlines. If you feel the need to do something, contribute more when the headlines report the sky is falling.
The importance of a low-fee passive investment, like an S&P 500 ETF, should be mentioned. Paying a high fee for your investment is an example of “he who doesn’t [understand it], pays it” (from the Einstein quote). The expense fees for ETFs vary between 0.05% and 1.0%, lower than the 0.50% to 2.0% that actively managed mutual funds often charge. A $10,000 investment with a 10% annual return over 20 years with an expense ratio of 0.50%, as we might get with an ETF, accrues to $61,416. The same investment with an expense ratio of 2.0%, as we might get with a managed mutual fund, accrues to $46,610. No need to say more.
If you want to invest, but don’t have $350, invest what you can. Start with small, comfortable contributions.
I suspect that for most of us, making it to a million dollars may require some of the following: living below our means, being frugal, driving a used truck, wearing a Timex watch, and prioritizing financial security. Texans express it well: You can have a “big hat and no cattle” or a small hat and lots of cattle. The choice is yours.