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Do you want to grow $100,000 into $1 million in retirement savings?
It might sound like a tall order, but it can actually be achieved within your lifetime with just a 10% annualized return. If you aren’t aware, 10% is about what U.S. stocks as a whole have delivered over the last 30 years. Thanks to the power of compounding, this 10% return can easily turn $100,000 in a million with enough time. Here’s how.
Returns needed to turn $100,000 into a million
To turn $100,000 into a million, you need a 900% return. That is, you need to achieve $900,000 in gains plus the $100,000 you started with. You might be wondering how on earth that can be done when 900 divided by 10 is 90. Shouldn’t it take 90 years — more than an average human lifespan — to get to $1 million from $100,000?
No, it does not take anywhere near 90 years. Thanks to the magic of compounding, it takes more like 25 years. When it comes to stock returns, you don’t get the holding period return by simply summing annual returns on the base amount. Instead, you multiply one plus each year’s return together, then subtract one.
1.1 to the power of 25 is 10.83. Subtract one and you’re left with 9.83, which, in percentage terms, is 983%. So, a 10% return will add up to a 900% return if you earn it consistently over 25 years. In fact, it would only take 24-and-a-half years to get to 900% at 10% per year, as 983% is a little higher than we need.
So, turning $100,000 into a million is quite doable with historically typical stock market returns. That does not mean that such an outcome is guaranteed. Possibly, future stock market returns will be worse than past returns. Nevertheless, 10% is not an unrealistic annualized return to aim for. You may not achieve it, but by buying the type of diversified portfolio that produced such returns in the past, you should at least do okay.
Some investments to consider
Having explained that a 10% annual return can turn $100,000 into a million dollars over 25 years, it’s time to explore some investments that could help you achieve this result.
Index funds are always good choices. They invest in diversified portfolios of stocks that reduce your risks. Overall, they are highly recommended.
If you’re interested in individual stocks, you could perhaps consider something like Toronto-Dominion Bank (TSX:TD). TD Bank is a Canadian bank whose shares have a 4.83% dividend yield. The yield alone takes you about halfway to the 10% per year return needed to make the math above work. Second, TD Bank is doing well as a company. It has grown its revenue by 7% per year over the last five years. It has a payout ratio of 47%, meaning it’s paying out less than half of its profits as dividends. Finally, it is investing in expansion, having bought out the U.S. investment bank Cowen earlier this year. Overall, it’s a good bank for your buck.
