Indeed, it's quite possible for you to retire as a multimillionaire using nothing more than a little bit of money, consistently invested for quite a long time. You don't even need Warren Buffett-like investing skills to get there, just the patience, discipline and consistency to keep to a plan.
These five tips will start you on the path toward golden years that are truly golden.
Tip 1: Rely on Your Most Powerful Tool: Time
If you're in your 20s and remain in good health, you can reasonably expect to work for roughly the next 40 years. If you'd like to leave the rat race early, though, or if you want to strive for the kind of retirement only available to the truly wealthy, now is your absolute best chance to position yourself for that kind of success.
Just take a look at the table below that shows how much you can end up with after 40 years of consistently investing every month:
|Monthly Investment||10% Annual Returns||8% Annual Returns||6% Annual Returns||4% Annual Returns|
That $12.6 million could be yours if you consistently invest $2,000 each month at 10 percent annual returns. That 10 percent annual return level is about what the S&P 500 (^GSPC) has returned on average, including dividend reinvestment, over the long haul.
While there are no guarantees in the market, notice how you still wind up a multimillionaire if you sock away that much every month and only earn 4 percent average annual return during those 40 years.
Tip 2: Leverage your raises to go from $0 savings to $2,000
Of course, the toughest part of investing $2,000 a month -- or even $100 a month, for that matter -- is coming up with that kind of cash in the first place. While, as a 20-something, you probably aren't at the high end of your salary curve, you are more likely in the high growth part of that curve. As you gain experience and build expertise in your chosen field, your salary will likely rise faster now than it will once you've reached mastery level pay in your profession.
Start with what you can put away now, but take advantage of each raise to sock away more. You won't miss the money you hadn't been spending before you got the raise, but that cash can go a long way towards getting your long term investing plan up to full speed. And even if you never expect to reach that full $2,000 target, remember that the more you put away for a longer period of time, the better off you'll be, all else being equal.
Tip 3: Make it automatic
If you want to get serious about investing decent chunks of change for your future, one of the most powerful tools at your disposal is your employer's direct deposit program. You'll be far less tempted to spend money that gets automatically sent to an investment account or automatically contributed from your paycheck to your 401(k), 403(b), or other employer-sponsored retirement plan.
No matter what the market does, pretty quickly after starting to automatically invest, you'll probably notice a remarkable thing -- that you don't miss the money nearly as much as you may have thought you would. Then just let that cash continue to work on your behalf for decades and eventually it will help you retire in style.
Tip 4: Take full advantage of free money
Perhaps the best part of the quest to get to your monthly savings target is that you don't have to do it alone. Uncle Sam and your boss will likely chip in.
If you have a qualified employer-sponsored traditional 401(k) or 403(b) plan, every dollar you stick in that plan is tax deferred, so you don't pay income taxes on that money.
In 2013, the maximum you can sock away as a 20-something to one of those tax-deferred employer sponsored plans is $17,500. If you don't have access to an employer-sponsored plan at work, you can still make a deductible contribution to your traditional IRA, which offers the same immediate tax deduction as a contribution to a plan at work. You can invest $5,500 in an IRA in 2013.
If you have access to a retirement plan at work, you can still contribute to an IRA -- you just may not be able to deduct that contribution. Regardless of whether you're eligible to deduct it, money you put in your IRA or qualified employer-sponsored plan grows tax deferred on your behalf, and perhaps even tax free if you're using a Roth style account. $17,500 in an employer plan plus $5,500 in your IRA is $23,000 a year -- almost that entire $2,000 a month. An employer match can easily put you over the top.
Tip 5: Keep it simple
Finally, remember that these potential future amounts are based on the idea that your investments will earn somewhere around what the S&P 500 has earned over the long run. One way to start out on that track in your 20s is by putting your money in a low-cost S&P 500 tracking fund like the S&P Depository Receipts (SPY). As you get more comfortable investing over time or should you get more financially conservative as you age, you can always adjust your allocation later.
If you do this, though, it's important to remember that while the market has performed well over time, it doesn't go up in a straight line. The market can drop for years at a time, as it did in the recent "lost decade." That's why it's so important to consistently invest for your retirement, every month.
When the market drops, your account balance may fall, but each new contribution or dividend reinvestment buys more shares of the investment you're buying. Those additional shares will still be yours when the market starts to recover, boosting the benefits you get from buying low.
Get started now
The primary advantage you have in your 20s is time. The sooner you start saving for your retirement, the easier it is for you to get there comfortably. Following these five tips will get you the foundation you need to succeed. Once you get your plan in motion, you'll be amazed at how much better off you'll be than had you never started in the first place.
Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.