How to Retire with a Million

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Without robbing a bank or winning the lottery, how can anyone retire and have a million dollars or more? Can you become one of the 5 million millionaires in the U.S.?

Steve Martin had a comedy routine about how to reach the goal with the opening line, "First, get a million dollars."

In the real world many factors, including your time horizon, risk appetite, initial funds available to invest and how much more you can contribute periodically need to be considered. The longer the horizon the less risk you'll need to take. The shorter the horizon the more risk you'll need to take. The more money you have to invest the shorter the horizon will be. Etc. etc. So many possibilities.

I'll go back in time to illustrate a proposal for you.

It's the early 1980's and you are working as an engineer and make a salary of $24,000 per year. You say: "I'd like to retire in 2012 with a million dollars saved. How can I get there?"

One way to do it is to invest in the "market". Based upon the past the stock market has returned about 10% on average every year, including reinvestment of dividends. So let me run some numbers for you assuming that you are invested in the "market" within your 401k and will not pay taxes until you withdraw funds. Also assume that you need most if not all of the money right when you retire and pay taxes on the proceeds. Note, most likely you'll need only a portion of the funds at any one time.

The following parameters were used in the calculations:

1. $10,000 initial investment,

2. Additional contribution of 10% of your salary or $200 per month which is increased by 5% every year resulting in an "average" of $500 per month over the 30 years (for a total of $200,000),

3. Federal marginal tax rate of 35% on the income over $385,000.

4. State tax rate of 3.5%,

5. Inflation = 0% (to keep the analysis simple for now -- later if you wanted to you could add an inflation component),

6. Standard deduction of $5,800,

7. Exemptions of $3,700.

The result is that you'll get your million (actually $1,214,000) but after paying taxes you would only have about $780,000 left. So you are a little short of the goal.

There are a few things that can improve your performance. One is increasing the savings rate and put additional funds into your investment. Another is to take on more risk and get a higher return. Can you get more than 10% a year? Can you beat the market to ensure your million? 

We'll assume that you can not increase the savings rate and that you need to take on more risk. If you invested in a basket of stocks which have showed consistent dividend and/or earnings growth year after year you could get there. And actually the risk level is not that bad.

I picked the following stocks for the portfolio:

1. Coca-Cola (NYSE: KO). The company has been around for about 120 years. It's not going to go away anytime soon. It has generated solid earnings and dividend growth year after year. The dividend has been paid every year since 1920 and has been increased every year since the early 1960's. It has the best known product brand (Coke) in history. It has a lot going for it.

2. McDonald's (NYSE: MCD). The famous golden arches indicate another great brand. Who doesn't recognize them? The company has also grown earnings and dividends consistently over a period of decades. It has achieved growth through innovations such as introducing a breakfast menu. A small change like that resulted in a relative large increase in revenues and earnings. I'm lovin' it.

3. Johnson and Johnson (NYSE: JNJ). This large, $191B market cap, company supplies a variety of consumer products, pharmaceuticals, and medical devices. It currently yields 3.5% and has increased its dividend every year for over 50 consecutive years. The company was founded in 1886. It is what I call a "classic stock".

4. Procter and Gamble (NYSE: PG). It is very similar to JNJ. It is a slightly bigger company with a market cap of about $200B and owns many well-known brands like Tide, Pampers and Gillette. Who doesn't need those items on a daily or weekly basis? It has existed for well over a hundred years. Another classic.

5. Apple (NASDAQ: AAPL). The iconic maker of personal music players, smart phones and tablet computers, known the world over, also introduced the first personal computer in the 1970's. It is the consummate high growth technology company but recently resumed paying a dividend. The latest iPod and iPhone models were just introduced and reports indicate that a mini version of the iPad will be announced soon. The Apple cult is devoted and growing. Consumers routinely camp out in front of Apple stores worldwide before a new item goes on sale.

The first four were bought in June 1982. All are members of the Dow Jones Industrial Average and Dividend Aristocrats, stocks that have increased dividends every year for at least 25 consectitive years. Apple had its IPO in Sept. 1984 and shares were purchased then. The stocks were held in a taxable brokerage account without taking any profits (a very long buy and hold period) but the taxes on the dividends earned were paid each year. I chose to reinvest dividends for you. Trust me, you'll come out ahead.

The total original position was $10,000 ($2,000 in eack stock) and no additional stock was purchased. Therefore, there is still a average of $500 per month available for other investments. The 401k plan I have contains a stable value fund which has yielded about 5% to 7% a year on average so let's assume you have a similar plan to invest in. Or you could have bought the market and again achieved the average 10% return.

The results indicate that the mix of stock and the 401k investments resulted in a combined portfolio value of $1,487,000 before taxes after 30 years. That is $200,000 more than if you just bought the market. However, after taxes the you would net about $900,000 so still a little short of the goal.

Therefore, you would have needed to do something more. If you had an additional $10,000 available and bought more shares of Apple both in June 1992 and June 2002 (or just in June 2002) the combined stock and 401k accounts would total at least $2,160,092 today. You would be well over the magic $1,000,000 mark (probably around $1,500,000) after paying taxes. Note that you achieved your millionaire status by investing only $200,000 of your own money. A seven to one gain is pretty good. If you could have contributed more then of course your returns would have been more as well.

Note that I may have recommended that you diversify a bit by buying another stock or two other than Apple in 1992 and 2002 but to keep this analysis simple I'll stick to just the five total stocks.

Here are details of your results:

1. Stocks: 

<table> <tbody> <tr> <td> <p><span><strong>Position</strong></span></p> </td> <td> <p><span><strong>Initial Price</strong></span></p> </td> <td> <p><strong><span>Last Price</span></strong></p> <p><span><strong>(Oct. 2012)</strong></span></p> </td> <td> <p><span><strong>Initial Annual Dividend</strong></span></p> </td> <td> <p><span><strong>Current Annual Dividend</strong></span></p> </td> <td> <p><span><strong>Cost Basis</strong></span></p> </td> <td> <p><span><strong>Current Portfolio Value</strong></span></p> <p><span><strong>(*)</strong></span></p> </td> </tr> <tr> <td> <p><span>MCD</span></p> </td> <td> <p><span>$1.12</span></p> </td> <td> <p><span>$90.93</span></p> </td> <td> <p><span>$0.03</span></p> </td> <td> <p><span>$3.08</span></p> </td> <td> <p><span>$2,000</span></p> </td> <td> <p><span>$162,375</span></p> </td> </tr> <tr> <td> <p><span>KO</span></p> <p><span> </span></p> </td> <td> <p><span>$0.34</span></p> </td> <td> <p><span>$38.34</span></p> </td> <td> <p><span>$0.05</span></p> </td> <td> <p><span>$1.02</span></p> </td> <td> <p><span>$2,000</span></p> </td> <td> <p><span>$225,529</span></p> </td> </tr> <tr> <td> <p><span>JNJ</span></p> </td> <td> <p><span>$1.27</span></p> </td> <td> <p><span>$68.96</span></p> </td> <td> <p><span>$0.06</span></p> </td> <td> <p><span>$2.44</span></p> </td> <td> <p><span>$2,000</span></p> </td> <td> <p><span>$108,598</span></p> </td> </tr> <tr> <td> <p><span>PG</span></p> </td> <td> <p><span>$1.17</span></p> </td> <td> <p><span>$68.79</span></p> </td> <td> <p><span>$0.13</span></p> </td> <td> <p><span>$2.25</span></p> </td> <td> <p><span>$2,000</span></p> </td> <td> <p><span>$117,590</span></p> </td> </tr> <tr> <td> <p><span>AAPL</span></p> </td> <td> <p><span>$2.85</span></p> <p><span>(Sept. 1984)</span></p> </td> <td> <p><span>$661.31</span></p> </td> <td> <p><span>N/A</span></p> </td> <td> <p><span>$10.56</span></p> </td> <td> <p><span>$2,000</span></p> </td> <td> <p><span>$464,000</span></p> </td> </tr> <tr> <td> <p><span>AAPL</span></p> </td> <td> <p><span>$12.56</span></p> <p><span>(June 1992)</span></p> </td> <td> <p><span>$661.31</span></p> </td> <td> <p><span>N/A</span></p> </td> <td> <p><span>$10.56</span></p> </td> <td> <p><span>$5,000</span></p> </td> <td> <p><span>$260,000</span></p> </td> </tr> <tr> <td> <p><span>AAPL</span></p> </td> <td> <p><span>$8.00</span></p> <p><span>(June 2002)</span></p> </td> <td> <p><span>$661.31</span></p> </td> <td> <p><span>N/A</span></p> </td> <td> <p><span>$10.56</span></p> </td> <td> <p><span>$5,000</span></p> </td> <td> <p><span>$413,000</span></p> </td> </tr> <tr> <td colspan="5"> <p><span><strong>Portfolio Totals</strong></span></p> </td> <td> <p><span>$20,000</span></p> </td> <td> <p><strong>$1,751,092</strong></p> </td> </tr> </tbody> </table>

 (*) Value before taxes

2. 401k

Current value (before taxes) = $409,000.


So a million really isn't a million. You'll need to factor in taxes in your calculations. To reach your goal that means up to two million should be accumulated. While just buying the market isn't bad, investing in individual stocks ensures that you get there. Congratulations, you are now a millionaire. Let's try for a billion next.




Mathman6577 owns shares of Apple, Johnson & Johnson, The Procter & Gamble Company, McDonald's, and The Coca-Cola Company. The Motley Fool owns shares of Apple, Johnson & Johnson, and McDonald's. Motley Fool newsletter services recommend Apple, Johnson & Johnson, McDonald's, The Coca-Cola Company, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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