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A Million Dollar Portfolio: Easier Than You Might Think

Introduction:

In the movie, Office Space, there is a scene where three characters are standing around the copy machine and having a conversation. It goes something like this:

Peter Gibbons: Our high school guidance counselor used to ask us what you'd do if you had a million dollars and you didn't have to work. And invariably what you'd say was supposed to be your career. So, if you wanted to fix old cars then you're supposed to be an auto mechanic.

Samir: So what did you say?

Peter Gibbons: I never had an answer. I guess that's why I'm working at Initech.

Michael Bolton: No, you're working at Initech because that question is b.s to begin with. If everyone listened to her, there'd be no janitors, because no one would clean crap up if they had a million dollars.

Samir: You know what I would do if I had a million dollars? I would invest half of it in low risk mutual funds and then take the other half over to my friend Asadulah who works in securities...

Michael Bolton: Samir, you're missing the point. The point of the exercise is that you're supposed to figure out what you would want to do if...

What I Know:

Office Space came out in 1999. Back then, a million dollars was a lot of money. I remember when I was a kid, thinking that a million dollars would probably be more money than anyone could ever need.

Now, make no mistake, a million dollars is a still a good deal of money today, but a million bucks just doesn't seem to go as far these days as it used to go.

Regardless, the question today is this. "If you had a million dollars, what would you do?"

Well, before you can do anything, you have to have a million dollars. Here's where things get tricky for most people. They look at a million dollars and they think that there is no way that they will ever reach that goal. But, they're wrong. It's actually not all that difficult. The hard part is actually getting started and putting aside all your rationalizations as to why you can't have a million dollars.

How To Have A Million Dollars:

Let's take a look at this project from the perspective of someone who is starting out at age 25. That individual would have a potential 40 years of investing before reaching what is today known as "retirement age."

While the best vehicle for putting aside the most money is the 401k plan that many of us have at work, sometimes the investment options available in the 401k are not all that great. When you compare other tax deferral investment options, perhaps the Roth IRA lends itself well to our goals. Regardless, I am not endorsing any particular investment vehicle, but will use the Roth and Traditional IRA as points of discussion, relative to the amount of money that can be invested.

This year, the Roth and Traditional IRA investment vehicles allow an individual who is younger than 50 to put aside $5500. The amount of earnings that can be put into the retirement plans has been growing over the years and should continue to grow as we move forward.

By committing to investing $5500 a year in a Roth or Traditional IRA, with a rate of return in the 8% range, and investor can expect the following results:

(click to enlarge)

Investing $5500 a year, with an 8% growth rate, will earn you $1,658,280.42 at the end of 40 years and our example reaching age 65.

Our example investor actually becomes a millionaire in 2047, which is 34 years from the starting point in 2013.

What You Should Know:

There are some people who would be unable to save $5500 a year in their initial work years. However, saving whatever you can is a key to having long term success. If you never save because you can't reach the $5500 number, today, you will fall farther behind when you decide to save nothing.

In this example, we never increased the amount of money being put aside in the retirement account. As our income grows and as the government increases the amount of money that we can save in a Roth or Traditional IRA, it makes sense to try and reach those increased savings amounts.

Starting early makes all the difference in the world. The longer you delay, the lower your end results are going to be. It's all about math.

Summary and Conclusion:

In our example, the individual is going to save $220,000 of his own money, ($5500 x 40 years), but he will have 1.6 million dollars put away.

Having a spouse who can do the same thing makes the exercise even better, in my opinion.

What I look for in investing this money is:

1. Stocks that are priced at a value to their intrinsic worth

2. Companies that have a long history of paying dividends

3. Companies that increase dividends annually

4. Companies that have DGR larger than inflation

5. Reinvest dividends for capture of compounding