Many people dream of early retirement. But pulling it off is the tough part. But you're asking the right questions — allowing you to put real numbers to the test to see if you can do this.
Specifically, the question you asked on Reddit is: "I am 43 years old and want to retire at 50. I have $1.8 million in my account. How can I turn it into $5 million before I retire?"
The answer is yes. It's doable. But as the numbers show, it's going to take a combination of big-time sacrifice and luck (or both) that may be too far for many people. I've created a spreadsheet to help calculate some of the variables. Feel free to email me at matt.krantz@investors.com if you'd like a copy of the spreadsheet I used.
So, let's dig into the numbers.
Turning $1.8 Million Into $5 Million in Seven Years
For a starting point, I assumed two factors. First, I assumed you'd invest your money in an S&P 500 index fund. The S&P 500 has generated a roughly 10% average annual return since 1928, says Aswath Damodaran of New York University. As long as you contribute a hefty $100,000 annually for retirement and get the 10% average annual return on your portfolio, you'd have $5 million when you're 50 years old.
This shows you how deep you'll need to dig to hit $5 million by the time you're 50. Putting all your money into the S&P 500 isn't really recommended, as it would be wise to put some money in other assets that are less volatile to diversify. Additionally, contributing $100,000 annually to your retirement fund isn't something most people can afford.
What if you cut that required contribution in half, to $50,000? Then you'd wind up at 50 with $4.4 million — falling short of your goal. Of course, this means you'll need to find a source of higher returns. But how high? Staying with the $50,000 annual retirement fund contribution, you'd need an average annual return of 11.8% to end up with $5 million when you're 50.
How do you get an 11.8% annual return when the S&P 500's long-term return is just 10%? A couple of ways are possible. Certainly, the S&P 500 might outperform its long-term average. It happens. The S&P 500 generated a nearly 13% return annually from 2015 through 2024, Damodaran said.
The other option is to take on riskier stocks with more volatility. Small-cap stocks, for instance, returned 11.7% a year on average since 1928. That would do it.
Retirement Reality Sinks In
So while it's possible to do what you're aiming for, you can see the numbers are onerous for most people. Perhaps a more realistic goal if you're aiming for $5 million to retire would be 54 or 55.
Assuming a more realistic 8% average annual return plus a more palatable annual contribution of $20,000, you'd have $5.3 million by the time you're 55. That's still 10 years earlier than many people retire. Below in the table I'll show you the math for how this works.
Best of luck. You're on your way to hitting an aggressive goal. You're definitely asking the right questions.
How To Get To Retirement Early
See how $1.8 million grows with 8% annual returns and $20,000 annual contributions
| Age | Savings | Market Gain | Contribution | Ending |
|---|---|---|---|---|
| 43 | $1,800,000 | $144,000 | $20,000 | $1,964,000 |
| 44 | 1,964,000 | 157,120 | 20,000 | 2,141,120 |
| 45 | 2,141,120 | 171,289 | 20,000 | 2,332,410 |
| 46 | 2,332,410 | 186,592 | 20,000 | 2,539,002 |
| 47 | 2,539,002 | 203,120 | 20,000 | 2,762,123 |
| 48 | 2,762,123 | 220,969 | 20,000 | 3,003,092 |
| 49 | 3,003,092 | 240,247 | 20,000 | 3,263,340 |
| 50 | 3,263,340 | 261,067 | 20,000 | 3,544,407 |
| 51 | 3,544,407 | 283,552 | 20,000 | 3,847,959 |
| 52 | 3,847,959 | 307,836 | 20,000 | 4,175,796 |
| 53 | 4,175,796 | 334,063 | 20,000 | 4,529,860 |
| 54 | 4,529,860 | 362,388 | 20,000 | 4,912,249 |
| 55 | 4,912,249 | 392,979 | 20,000 | 5,325,229 |
