- Maximizing Your Investments: Top Assets for Small Budgets - June 20, 2023
- Investing Made Easy: A Beginner’s Guide to Index Funds - March 30, 2023
- Do Index Funds Have Fees? [Don’t Overpay] - March 21, 2023
Everyone wants to retire, but it costs money to do so.
That’s why we invest in the stock market.
Investing in the stock market is one of the greatest ways to grow your capital so you can prepare to retire.
In this article, I will show you how much you need to invest each month so you can have a million dollars by the time you retire.
How do I determine how much I should invest each month into the stock market?
It depends on what your goal is.
If your goal is to save up for a new car, you really shouldn’t be investing at all. The stock market is a long-term investment and saving for a car is a short-term goal. In the short term, you can’t predict what the market is going to do.
Retirement is a long-term goal that may take a lifetime to prepare. That’s what makes the stock market a perfect investment for retirement.
I will walk you through how much you need to invest each month with retirement as the goal.
1. Determine your asset allocation
You first need to determine your portfolio’s asset allocation. Different allocations yield different returns, which may delay or accelerate your date of retirement.
I recommend having the following three as your main investments. You can always build from here as you wish later on.
- A domestic index fund
- An international index fund
- A bond index fund
Pretty simple, right? You can start investing with only three index funds. This model is based off of the 3-fund portfolio strategy.
Not sure which index fund to choose? We have an article on the top domestic index funds and an article on the top international index funds.
Now that we’ve chosen our investments, we can decide how much of your portfolio we’re going to allocate to each one.
All three investments have historically yielded different returns. For example, a domestic fund has historically yielded around 10% annually. An international fund has yielded around 3% annually, and a bond index fund has yielded around 2.8%.
Does that mean you should allocate 100% of your portfolio to a domestic index fund?
No, that wouldn’t be a good idea.
Here are other things you must consider when determining your asset allocation.
How much volatility can you handle?
Can you watch your portfolio drop 57% in one year? Well, that’s exactly what happened in 2008 during the financial crisis.
Someone with a 100% domestic index fund portfolio would’ve watched their portfolio drop 57% in value. You need to ask yourself if you have the stomach to hold through such a drop.
For those who have a lower tolerance for risk, bonds can serve as a tool to dampen volatility in your portfolio. The more you allocate to bonds, the less volatile your portfolio will be. However, because bonds have historically yielded much less than stocks. The more you allocate to bonds, the less upside your portfolio will have as well.
Would you rather take on more risk for higher returns? Or would you settle for lower returns in exchange for less volatility? This is entirely a matter of personal preference and it’s up to you.
You can use Portfolio Visualizer to play with different asset allocations. For example, you can test out a 90/10 stock/bond portfolio, and also test a 60/40 bond portfolio. I will go into more detail about this tool in a bit.
If you’re still not sure you should have bonds on your portfolio, check out our article on bonds that goes into much more detail.
Past performance does not guarantee future performance
This is an important statement we all must remember.
Just because domestic stocks have outperformed international stocks in recent years, it doesn’t mean this trend will continue forever. The U.S. could very well fall behind while emerging countries experience an economic boom. You definitely don’t want to miss out on this boom because it will provide you with a great opportunity to grow your capital.
The point is, nobody can predict what will happen in the future.
That’s why instead of predicting, we prepare. We can prepare by diversifying outside of U.S. borders, and into international markets. I have an article that explains why you should invest internationally that goes into further detail.
Use Portfolio Visualizer
Portfolio Visualizer is a great tool you can use to test different asset allocations. Let me show you how to use it.
First, click on the “Backtest Asset Allocation” link.
Scroll down to “Asset Allocation,” and select the following from the dropdown menu.
This will create our portfolio I mentioned earlier. From there, you can analyze different asset allocations.
Let’s say for example you wanted to compare how allocating 10% bonds to your portfolio would change the returns. You can use “Portfolio #1” to enter the first portfolio without bonds and “Portfolio #2” to enter the second with bonds.
Click on “Analyze Portfolios” and compare the two.
Use this tool to see which asset allocation you would be comfortable holding. Take note of the “Max. Drawdown” column to see if you could hold that allocation without panicking.
2. Determine when you want to retire
The second step to determine how much you should invest each month is to determine when you want to retire. The more time you have until retirement, the less you would have to invest each month.
You can simply use this calculator and it will automatically do the calculations for you.
Recalling the information from the beginning of this article, our main goal is to get you to retire a millionaire. Open the link to the calculator and enter “1,000,000” into the “Savings Goal” section.
After that, you will need to determine how much you can invest right now and how many years you have until you want to retire. Enter this information in “Initial Investment” and “Years to Grow.” I am going to say I have $1,000 to initially invest and 30 years until retirement.
For “Estimated Interest Rate,” you can use the information you got from Portfolio Visualizer. Find “CAGR” which stands for “compounded annual growth rate” and enter that number. I chose the portfolio without bonds.
Leave the “Compounded Frequency” as “Annually.”
After you’ve got all your numbers in, go ahead and click on “calculate.”
The results are in!
In my example, I would need to invest $593 each month if I wanted to retire a millionaire in 30 years.
What about you? Leave your comments below!
You can always try out different numbers to see different results. Play around with the calculator until you are able to achieve a number that best fits your situation.
Is it worth investing $100 a month?
Absolutely.
Investing $100 a month is better than nothing at all. Even if you cannot afford to invest that much, it will still put you ahead of someone who doesn’t invest at all.
Not only will investing help you beat inflation, but it will also grow your capital so you will have more at retirement.
If you feel like $100 a month is not enough to retire, you can increase your income. Check out our article on things you can buy that will make you money.
What should a beginner invest in?
Beginners should start by investing in index funds.
Index funds are the most passive and easiest way to grow your wealth. You won’t have to stock pick, because the index fund automatically tracks the benchmark.
All you have to do is invest in the fund, sit back, relax, and watch your investment grow.
Is it better to save or invest?
It depends on your goal. Ask yourself why you are investing.
If your goal is to grow long-term wealth with money you will not need until later in life, investing is the way to go.
If your goal is to save enough money for a down payment for a house or to buy a car, you should not invest in the stock market.
Saving to buy a car or for a down payment is a short-term goal. It is money you will most likely need within several years, and putting this money in the stock market is risky.
The stock market has historically yielded great profits in the long term, but you can’t predict what it will do within one year or two. It may go up, or it may crash. You will lose your money for that car or down payment if the stock market crashes.
Only invest money you will not need until later in life.
Conclusion
Long-term investors need to determine how much they will invest each month into the stock market. It is an important aspect of a smart investing plan.
To calculate how much you need to invest each month, determine your asset allocation and time until retirement, and follow the calculations outlined in this article.
It may be difficult to save money, but don’t be discouraged! Create a plan and stick to it. You will come out on top.
I hope this helps. Let me know how much you need to invest each month to retire a millionaire!