Can we be millionaire when we retire?
The short answer is yes (!) and of course there are some “but”. If on one hand, we do not need to be financial geniuses to do that on the other hand we need: discipline, planning and start as soon as we are born (parents need to do some planning as well).
How to do that? Let’s start from the high level requirements. We are teens or less, we have not much money, let’s put this money to work in a passive managed index e.g. the S&P500. We have a bad crisis, money go down by 50-60%, we might not care much: all our life is in front of us, in absolute terms we are not losing much capital and we do not need this money right away. On the opposite side, let’s say we are 70 years old and we have just retired and we have to live out of our savings and we want our savings keep making money for us. Best place to invest them: short term bonds with a pay off of 2.1% per year and a max drawdown of 0.4%. In between these two extreme cases, we can think of allocating more and more money as we grow into bonds and less into e.g. the S&P500.
Let’s now get down to some details and let’s do that in chronological order i.e. from when we are born until we are 100 years old.
We are born and we get 1,000 USD and every year until we graduate from college at 25 y.o. we get in our saving account $500. We (our parents until we are 18 y.o.) take the money and invest them in the financial market, at the beginning 100% in the S&P500 and by age 25, 30% in bond and 70% in the S&P500. We then start working until we are 70. Because we are wise and we understand the importance of compounding, every year we incrementally add in our broker account some of our savings until the age of 70 in which we can comfortably put the equivalent of 2019 $12,000/year. By 2089, this should be 48,000 USD assuming 2% inflation per year. The money that we put on the broker account each year are invested in a combination of bonds and stocks as e.g. indicated in the table below according to a given age range. By 2089, we should have made $3.6M ($870,000 in 2019 money purchasing power).
What next? We start enjoying our well deserved retirement spending 3-4,000 USD/month (2019 value) while investing all the remaining part in bonds giving us a steady 2%/year.
It is not complicated to be a millionaire, it just requires some planning and discipline.
This is what it can be achieved by using the S&P500 and simple bonds, we can then thinking of moving (wisely) to more sophisticated investment instruments and then we get the real deal!