Let time do most of the work for you.
The primary reason most people invest is to grow their money for retirement. If you have $100,000 to invest and time on your side, you can likely turn those six figures into a $1 million nest egg that will surely put you closer to your financial retirement goals. There are no foolproof methods, but there are ones that have stood the test of time. Here are three ways you can do it.
1. Invest a lump sum, sit back, and wait
There’s nothing that works magic in investing quite like compounding. It’s a reason Albert Einstein is credited with calling it the “eighth wonder of the world.” You always want to make money on your investments, but you should also want to reinvest those returns so they themselves also earns a future return — and that’s what compounding is. Thanks to compounding, $100,000 can turn into $1 million with little to no work, just time.
Let’s imagine you make a one-time $100,000 investment into an S&P 500 index fund, which historically returns 10% annually in the long run. Of course, year-to-year returns will vary, but if you have time on your side, you can count on it returning around that on average. If you made that one-time investment and let it sit for 25 years with those returns, it would have accumulated to over $1.08 million.
2. Speed up the process
Just because you have $100,000 to invest now doesn’t mean you have to stop investing in the future. If you don’t want to wait around 25 years for your $100,000 to turn into $1 million, you can continue making contributions and speed up the process. Let’s say you contribute an additional $500 monthly (the same as the contribution limit for IRAs for people under 50). In that case, you could cross the millionaire threshold in nearly 20 years with those same returns. If you contributed an additional $1,000 monthly, you could do it in just over 17 years.
There’s no need to invest $100,000 and get complacent; put your future earnings to work for you.
3. Use dividend reinvestment programs
A dividend reinvestment program (DRIP) is when your brokerage company uses the dividends you’re paid to automatically buy more shares of the company or fund that paid them. Instead of taking dividends as cash, reinvesting them to increase your total shares can add to the effects of compound interest and pay off big time in retirement. If the same fund from above paid out a 2.5% dividend yield throughout those same 25 years, you would have over $1.9 million.
Receiving your quarterly dividends in cash isn’t bad by any means, but it can be much more lucrative if you wait to receive cash payouts until retirement. If you managed to accumulate $1.9 million in a dividend-paying stock, even a 2% dividend yield would mean receiving around $38,000 annually in dividends. That could be a great supplement to other retirement income sources you may have, like a 401(k), IRA, or Social Security.
