Ah, 'one million dollars'… it has a nice ring, doesn't it. (Cue the Dr. Evil laugh)
For many of us, a 1 followed by six zeroes feels like a bit of a pipe dream. We imagine what it'd feel like and what we'd do with it, but those dreams have something of a surreal feeling about them – as is they are unattainable.
Here's the thing, though – those dreams don't have to be only that. It may well be within your power to bring them to life with a little discipline, and time.
Now of course, nothing in life is certain, least of all average financial returns. As the old cliché has it, past performance is no guarantee of future returns.
Imagine the possibilities
So with that out of the way, we can look at some of the possibilities. A recent report from Russell Investments and the ASX found that shares returned an average of just shy of 9% per annum over the 20 years to the end of 2011, using the S&P / ASX All Ordinaries (Index: ^AORD) (ASX: XAO) Accumulation index.
If we use that as an example, the Rule of 72 suggests you'll double your money approximately every 8 years.
(If you haven't heard of it, the Rule of 72 is pretty cool – divide 72 by your return % to see how many years it takes to double your money. For example, 72 divided by 6% equals 12 years. It's not exact, but a great rule of thumb!)
Adding regularly…
You can help the process along by adding regular deposits. If we hold the 9% per annum return as constant (with the obvious caveat that the market never rises in a straight line), here are some options to get to $1 million (all just for illustration and ignoring taxes and transaction costs):
Putting $100 per month aside, you'll have $1 million in 51 years.
Doubling that investment gets you there in 43 years.
If you could spare $500 per month (for example, the money you'll have when you finish paying off your current car loan or credit card), you can get to 7 figures in only 33 years.
Taking a slightly different tack, if you're hanging up the work boots in 20 years' time, at our hypothetical 9% rate, you'd need to be socking away $1,200 per month! Of course, hopefully superannuation will help you get there, too.
…and earning more
But here's the real magic. If you could improve your annual percentage return, you can really juice your results.
Let's take a middle ground of $250 per month. At 7% per annum, you'd have $1,000,000 in 48 years. Lifting that return to the 20-year average of 9% gets you there in 40 years.
If you could earn more – and it's a big if – you could get to 10% per annum, you'd have $1,000,000 in just over 37 years. 11% yearly would cut your timeframe to 35 years and 12% per annum has you there in a little over 33.
There's no substitute for time, which does most of the heavy lifting, but disciplined saving is a huge help.
The 'if' in the annual return comes from selecting the right investments. While the average annual return has been just under 9%, there have been some significant winners and losers over the last two decades. A good start for conservative investors might be sticking with an index fund, but other companies with high (sustainable) dividend yields – and some attractive franking credits – might help.
Foolish takeaway
Companies such as Westpac (ASX: WBC), trading on a fully-franked trailing yield of 7.5% and National Australia Bank (ASX: NAB) at 7.4% almost get you to the average by themselves. Throw in the tax benefits and some capital growth, and you're within sight of a double–digit annual return.
Telstra (ASX: TLS) is another option, and is one of the companies featured in our free report, Secure Your Future with 3 Rock-Solid Dividend Stocks. In this report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our other two favourite income ideas. But hurry – the report is free for only a limited time.
More reading:
- Foolish Preview: Media merry-go-round and debt on the agenda
- The best news ever for buy-and-hold investors
- 4 ways to beat complexity and uncertainty in your portfolio
Scott Phillips is an investment analyst with The Motley Fool. You can follow Scott on Twitter @TMFGilla. Take Stock is The Motley Fool Australia's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).
