As you invest for retirement, becoming a millionaire might be a reasonable goal. Yes, millionaire status is no longer rarefied air, and depending on your income needs, having at least $1 million in the bank might be necessary to last you through retirement. So let’s say you’ve gotten to a point where you’ve got $100,000 saved. Can you turn that into $1 million? The short answer is that it’s possible, but it won’t happen overnight. If you’re interested in maximizing your investment returns, consider working with a financial advisor.
Turning $100,000 Into $1 Million, Step by Step
Unless you win the lottery, building a seven-figure portfolio is usually a longer-term game. Having a roadmap to follow can help you reach your destination on schedule. The steps below are a great place to start.
1. Assess your starting point.
The first step in growing $100,000 into $1 million is taking stock of where you are right now. If you’ve got at least $100,000 to invest you might be doing pretty well in the savings department. But you should also take into account things like how much debt you have, your income and earning potential and your overall financial goals.
Also, you should be tuned into your time horizon for investing. Having 30 years to go until retirement versus 10 plays a big part in how successful you are at transforming $100,000 into $1 million.
2. Gauge your risk tolerance.
Risk tolerance and risk capacity are two factors to consider as you determine your investing approach. Generally, taking on more risk brings the potential to earn higher returns. But you’re also accepting a higher potential for losses.
That’s what risk tolerance is – how much risk you’re comfortable with. Risk capacity, on the other hand, is the amount of risk that’s necessary for you to meet your goals. Knowing how the two balance one another out is important to determine which investments you’ll use to turn your $100,000 into $1 million.
Cash, bonds and certificates of deposit, for example, are all safe investments. The potential to lose money is usually very low. But you’re not going to see spectacular growth from those investments. Stocks, on the other hand, can deliver much better returns, especially if you’re investing in small-cap companies with great potential for growth. But the trade-off is accepting the volatility that characterizes the stock market. Figure out how much risk you’ll need to take on to hit the million-dollar mark, and then see if you have the stomach for that kind of risk.
3. Run the numbers.
The next step in reaching $1 million in investment wealth is doing some math using different scenarios. Specifically, there are three things to keep in mind here: how much you can add to your investments monthly; how long you have to invest; and the rate of return your investments will earn.
So, let’s say you’re 35 years old and plan to retire at age 65. You have $100,000 to invest in the market thanks to a combination of diligent saving and receiving an inheritance windfall. You have an additional $100 per month to invest over the next 30 years.
Using SmartAsset’s investment calculator, your initial investment would grow to just over $930,000, assuming a 7% rate of return.
That’s not bad! But you can’t necessarily count on a 7% rate of return, and even that assumption puts you around $70,000 short of your $1 million goal. So how can you bump up your odds of hitting your goal?
There are two approaches you could take. The first is increasing the amount you invest monthly. Bumping up your monthly contributions to $200 would put you over the $1 million mark. The other option would be to try to exceed a 7% annual return with your investments. That’s harder to do, and trying to “beat the market” could leave you with losses if you’re not as good at picking investments as you thought.
Finally, note that this example assumes you have three decades to invest. But what if you’re 45 years old and will be retiring in 20 years? In that scenario, you’d need to increase your monthly investment amount to $1,200 to reach $1 million by age 65, assuming the same 7% return.
4. Allocate your assets wisely.
Whether you have a shorter or longer window for growing your investments to $1 million, it’s important to be mindful of asset allocation. This simply means the balance of assets in your portfolio and how those correspond in terms of risk and return.
How you allocate assets may depend largely on whether you prefer an active or passive investment strategy. If you’re a more active, hands-on investor then you may want to spend more time trading individual stocks, mutual funds or exchange-traded funds to try and get the best returns. On the other hand, if you prefer to be more hands-off you might be focused on investing in passive mutual funds, such as index funds.
The key with both is to stay on top of your asset allocation, rather than just setting and forgetting it. That means rebalancing periodically to make sure your asset allocation is on track to meet your goals. For example, if you’re aiming for an 80% to 20% split of stocks to bonds, you’d need to check your portfolio at least once a year to make sure you’re not drifting too far away from those numbers.
Automatic rebalancing is something you may be able to take advantage of if you’re investing with a robo-advisor platform. Robo-advisors can help you determine the best asset allocation, based on the information you provide about your risk tolerance, time horizon and goals. The platform then adjusts your allocation automatically to help you stay on course.
5. Minimize taxes and fees.
While you might focus exclusively on growth when it comes to how to invest $100,000 to make $1 million, don’t forget that there’s another side to the coin. Keeping your investment costs and tax liability as low as possible are crucial for hanging on to more of your investment returns.
On the fee side, it’s important to understand things like:
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Expense ratios for mutual funds and exchange-traded funds
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Trading fees if you’re buying and selling individual stocks
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Asset management fees charged by your financial advisor
In terms of taxes, your tax liability is often determined by whether you’re investing in a taxable brokerage account versus a tax-advantaged retirement account, as well as how long you hold investments. In a tax-advantaged account, such as a 401(k) or IRA, you’re deferring taxes on investment growth until you make withdrawals in retirement. A Roth IRA would allow for tax-free distributions in retirement.
With taxable accounts, you pay short-term or long-term capital gains tax on investment gains, depending on how long you hold the investment. The long-term capital gains tax rate applies to investments held longer than one year and it’s generally the more favorable of the two.
One way to manage taxation is to use tax-loss harvesting. This involves selling off stocks at a loss to offset reported gains. The key is making sure you don’t buy substantially similar investments within a 60-day window of selling, as this could trigger the wash-sale rule and wipe out any tax benefits.
Bottom Line
There is no magic wand you can wave or secret sauce formula for turning $100,000 into $1 million. It all comes down to strategy and making the most of the time you have to invest. The more time you have to grow wealth, the better. But even if you’re starting later it’s not impossible to cross the $1 million finish line in retirement.
Investing Tips
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Consider talking to a financial advisor about what you need to do to grow $100,000 into $1 million. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Calculators can come in handy for estimating how much you’ll need to invest to reach $1 million. For example, SmartAsset’s asset allocation calculator can fine tune your selection of securities necessary to hit your investment goal.
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