How To Save $1.5 Million Starting At 40

by: Financially Free Investor

Let’s say you just turned 40. It is high time to have a financial plan ready for retirement.

Fortunately, you have 20 years or more to save and compound. The length of time that your savings can compound generally has a greater impact than the actual savings.

We will provide three strategies that can be combined with modest savings or no savings at 40 to accumulate a significant wealth safely by age 62.

Let's say you just turned 40. Even for those who turned 40 a few years ago, or those who have not saved much for retirement, or you are looking for a multi-faceted investment approach at any age, this article could still be for you. Turning 40 years old is a milestone in itself. Welcome to the middle-age. But on the positive side, you are more mature, financially savvy, and more than likely well-settled in your career. You also have much greater income level than when you just started. Unfortunately, prior to 40, a vast majority of people can't see retirement savings as an important goal and don't pay much attention that it deserves. In the early years and even in the 30s, the thought of retirement appears to be so distant and elusive that so many people fail to save for it. It goes without saying that saving and investing at a younger age goes a long way in meeting retirement goals without stress. Only if we all could get this wisdom in our 20s or 30s, but it does not happen to a vast majority of us.

If you have not saved much or anything at all until you got to 40, still there is no need to panic or stress about it. Sure, you need to be serious about it now and delaying it any further can make meeting retirement goals increasingly difficult, if not impossible.

Importance of Starting Early

We cannot emphasize enough about the importance of starting saving early. However, most of us do not have this wisdom at the age of 25. Just for the sake of illustration, we will show two examples. Two friends John and Jim start working their similar full-time jobs at the age of 25. John started saving and investing right from day 1 and putting aside $250 a month in his investment account. He also increased the rate of his savings by 3% every year. By saving and investing this modest amount every month, and assuming an investment return of 8% (average over the span of 37 years), John would have a balance of over $1 million by the age of 62. Sure, the value of $1 million after 37 years will not be the same, and John will probably need to save more, but we will get to that point later.

His friend Jim does not see the importance of saving and investing at a young age and does not have this sense of urgency until he gets to 40 years of age. Let's see how much Jim will need to save every month (starting at 40) to get to a goal of $1 million by the age of 62.

Table-1 (below): Starting at age 25, saving $250 every month and increasing it by 3% every year, John hits the target of $1 million at age 62.


Table-2 (below): Jim starts saving at age 40, with no prior savings. If he starts with the similar amounts as John (see table-1, $389 every month at age 40) and increasing it by 3% every year, assuming the same 8% investment return, his savings would only grow to $393,000 at age 62. He would achieve less than 40% of the goal. To be able to achieve $1-million target while starting at age 40, Jim must save $1,000 every month starting age 40, increase it by 3% every year. This will be 2.5 times larger amount every month compared to John who started at age 25.


Also, some would argue that the assumption of 8% consistent sequential return is not practical. We admit it is a valid concern. However, we are talking of a very long horizon of 37 years, and an "average" return of 8% is quite achievable if one follows a disciplined approach. Moreover, 8% average-return is less than the long-term average of stock-market returns. If we like to be more conservative, we should rather work with an assumption of 7% consistent returns. In that case, John will need to save a bit more every month. A 25-year old must start with $320 every month (increase by 3% every year) or with $250 every month (increase by 4% every year) to reach $1-million goal by age 62.

It is important to note that the purchasing power of $1 million after 37 years would not be the same as it is today. So, a 25-year-old today should probably aim for 2.5 times or as much as $2.5 million to retain the similar purchasing power as of $1 million today (assuming an average rate of inflation at 2.5% for the next 37 years). That means if John is starting today, besides saving $250 a month, he should also save at least 6% of his income in a tax-deferred 401K account and increase it gradually over the years.

You just turned 40; It's Time to Plan A Strategy and Implement

Let's consider two scenarios:

  1. You have already saved $100,000 by age 40, somewhat similar to John in example 1 above. You recognize that $1.0 million may not be enough after 22 years, and you want to save at least $1.5 million. You want to save even more aggressively and invest wisely to get at least 8% average yearly returns. However, to reach your goal of say $1.5 million by age 62, all you need is to save 6% of your gross family income (assuming 100,000 of family income). However, to be more conservative and assuming only 7% average returns, you may have to save 8% of your gross family income.
  2. Let's assume you followed Jim's example and you have not saved anything much until you got to 40. However, there is no need to panic; you still have plenty of choices. All it needs is a strong determination to save more now and invest wisely to get at least 8% average yearly returns. Since you have not saved much until now, to reach your goal of $1.5 million, you will need to save much more aggressively than the first option, maybe as much as 13-15% of your gross family income, assuming 100,000 of family income.




40 years

Current savings

$100,000 in tax-deferred retirement accounts,

$20,000 in emergency cash.

Current annual gross family income


Future savings rate

6% ($6,000 a year, increase 3% every year), preferably 8%

Employer's match in 401K

80% on first 6% ($4,800 a year)

Total savings per year

$10,800 (inclusive of employer's match)

Yearly growth-rate from investments


Target Goal at age 62

$1.5 million

Note: We will discuss how to achieve 8% growth in the next section of this article. Also, the saving rate should preferably be more like 8% to compensate for any shortfall in growth/returns.





40 years

Current savings

None in tax-deferred retirement accounts,

$20,000 in emergency cash.

Current annual gross family income


Future savings rate

13% ($13,000 a year, increase 3% every year), preferably 15%

Employer's match in 401K

80% on first 6% ($4,800 a year)

Total savings per year

$17,800 (incl. of employer's match)

Yearly growth-rate from investments


Target Goal at age 62

$1.5 million

Note: We will discuss how to achieve 8% growth in the next section of this article. Also, the saving rate should preferably be more like 15% to compensate for any shortfall in growth/returns.


Sample Portfolio Construction: How to get an average of 8% or more yearly return

We like to invest in multiple strategies using the concept of buckets (or baskets). This helps not only in providing diversification but also provides some level of hedge during the times of market stress. Even though, investing has become very easy for ordinary folks in terms of online brokerage accounts, low commissions, and online research resources. However, on the other hand, investing successfully and growing money has never been easy, and it is not so today. While we all want a high rate of return on our investments, preserving the capital from big losses is critical to long-term success. Depending solely on index investing may turn out to be a bit risky, volatile and bumpy. That's why, in our view, it is important that we employ a few strategies.

For the purpose of this portfolio construction, we will use three investment-buckets:

  • DGI portfolio -> 35-45% of assets
  • Risk-Adjusted Rotation Portfolio (401K accounts) -> 35-40% of assets
  • High-Growth Portfolio -> 15-25% of assets.

Bucket 1: DGI Portfolio (35-45% of Assets)

This bucket could be implemented inside your IRA/ROTH-IRA or taxable-brokerage accounts. However, this bucket could be inside your 401K accounts as well. If you are solely investing in a 401(k) type of account, which is managed by your employer (or employer-sponsored fund company), it may or may not allow investment in individual stocks. However, many of the employers have contracted this out to companies like Fidelity, which in turn allow investing a certain portion of your assets in individual stocks in a brokerage type account.

One could select 20-30 large, blue-chip companies with a solid history of paying and growing dividends. Since we are designing this for a 40-year old, we should include some companies that may have low current yield but high growth rates of dividend, for example, MasterCard, Home Depot, Boeing and Texas Instruments. An overall yield of 3% for the portfolio should suffice, which would grow to at least 6-8% yield on cost in the next 20 years.

Below, we provide a sample selection of 25-stocks (sorted on sector/industry) for demonstration purposes. The average current yield is 3.65%.


Company Name


Dividend Rate


Boeing Co (BA)




United Parcel Service (UPS)

Air & Freight Services



Main Street Capital (MAIN)




PepsiCo (PEP)




LyondellBasell Industries (LYB)




Unilever (UL)

Consumer Staples



Procter & Gamble Co (PG)

Consumer Staples



Lockheed Martin (LMT)




Exxon Mobil (XOM)




Valero Energy Corp. (VLO)




Well Fargo (WFC)








Tyson Foods, Inc. (TSN)

Food/Farm Products



Johnson & Johnson (JNJ)




Home Depot

Home Improvement Stores



Illinois Tool Works Inc. (ITW)




S&P International ETF (DWX)

International ETF



Realty Company (O)




Ventas, Inc. (VTR)




CVS Health Corp. (CVS)




Texas Instruments Inc (TXN)

Tech/ Semiconductor



Microsoft (MSFT)




AT&T (T)




Altria Group (MO)




Dominion (D)






Note: We assume that the dividends will be re-invested either in the original stocks or in new stocks.

Bucket 2: 401K Account Strategy (Roughly 35-40% of Assets)

Let's face it. At 40 years, much of your savings (or future savings) will be tied to your employer-sponsored '401K' plan. Some of the 401K plans offer only a few mutual funds or ETFs. Fortunately, most of them offer at least some funds that are tied to the broad market indexes like S&P500 as well as funds from different categories like Large-cap, Mid & Small Cap, International, and Emerging Markets. Keeping this in mind, we will suggest two options:

Option 1: Buy-and-Hold portfolio:

A buy-and-hold type of portfolio is not necessarily bad for a 40-year old since he/she would have at least 20 years before retirement to smooth out the returns. Moreover, they would be automatically adding contributions every paycheck, mostly every two weeks or twice a month. This is similar to the dollar-cost-averaging approach. The dollar-cost-average approach can be very helpful for 20-year time horizon because you would be buying in good times as well as bad, which means you would be buying at high as well as low prices. But the key requirement is that one must follow the discipline. The biggest advantage of such a portfolio is that this is essentially set-and-forget kind of portfolio and can be left on auto-pilot, except maybe annual rebalancing. If this is what one prefers, the following type of allocation should work on a long-term basis. The below allocations can be suitably adjusted as one grows older.

  • 40% Large-Cap Domestic stock fund
  • 15% Mid- and Small-Cap Domestic stock fund
  • 15% International Developed Markets fund
  • 10% Emerging markets fund
  • 20% Bond and/or Treasuries fund

Option 2: Risk-Adjusted Rotational approach:

Not every investor is capable of tolerating large drawdowns that occur from time to time, and they may panic just at the very wrong time. Besides, we should add that high volatility and large drawdowns can do a lot of harm to retirees who are in their withdrawal phase. As an alternative to option-1, which has very little downside protection, one could implement a risk-adjusted, rotation-based strategy. This kind of portfolio is designed to capture the majority of the growth during good times and reduce the drawdowns by at least 50% during bad times as well as reduce volatility at the same time. In other words, they provide far less volatility and drawdowns, which results in higher growth. Fortunately, this kind of portfolio can be very easily implemented inside a traditional 401(k) account or IRA accounts.

This strategy would rotate between S&P 500 fund and the treasury/bond funds. When the market is relatively strong and less volatile, the more funds get invested in the stocks (S&P 500); however, when the market starts declining and gets more volatile, more of the funds get switched to treasuries and/or bonds. In the example below, we are using volatility to adjust allocation to the S&P 500 and Treasuries. Higher the volatility, we will allocate less to stocks and more to Treasuries and so on. Such a portfolio may underperform the broader market slightly during strong bull markets, but protect the capital during major corrections or recessions. There can be many such strategies or variations that could be adopted. What volatility measures you use would depend on the individual's risk tolerance, but for our example, we have used target-volatility of 8%.

Author's Note: A similar strategy (Risk-Adjusted Rotation IRA portfolio) is part of our Marketplace service "High Income DIY Portfolios."

The benefits of such a strategy over long periods are clearly visible from the below chart. It provided slightly higher returns than the S&P 500 but without the bumpy ride:

Bucket 3: High-Growth Portfolio (15-25% of Assets)

This option is definitely more desirable at a younger age to provide high growth, although it does come with higher risks, so allocation should be gradually reduced as the investor grows older and approaches retirement.

But we consider 40 years of age as still young enough to include a high growth strategy at least for the next 10 years. Once you get to 50 or early 50s, you could gradually reduce the exposure to high growth strategy and move these funds to the DGI or Rotation strategy as outlined in bucket-1 or bucket-2.

This bucket will essentially invest in high growth areas of the economy, for example, Technology, Financials, Healthcare and Biotechnology. The problem is that something that is high-growth today may not be so after two years. So, this kind of portfolio will require at least yearly management.

Every year in January, run a stock screener to filter top 10 growth stocks that meet the following criteria:

  • Market cap > 10 Billion
  • Member of S&P 500, DJIA or NASDAQ 100 indexes
  • Revenue growth last 3 years > 10%
  • Total return last 12 months > 15-20%
  • The projected Forward EPS growth for the next 3 years > 10%
  • Select no more than 3 stocks from the same sector/industry

Buy the 10 stocks in equal proportions at the beginning of the year and keep them for the year. Repeat the selection process every year. Many of the names from the previous year will make to the subsequent year, but we expect few of them to drop from one year to next and replaced by new names. This strategy will require some work on a yearly basis. Most years this strategy will provide good results unless we are in a bear market. However, we do not have any back-testing results to support this strategy. Further, the downside is that there is no protection mechanism from market downturns or recession-like situations. If you can tolerate large drawdowns in this bucket, the strategy may be suitable for you. So, please know your situation and risk tolerance.


Our emphasis in this article is for folks who are already 40 or nearing 40 but haven't given much thought about the retirement savings. However, some of the investment-approaches outlined could be used by anyone including retirees. In the second part of the article, we presented various strategies to illustrate how one could construct a multi-bucket portfolio for success. Obviously, these strategies were presented just for demonstration purposes; however, one can adopt any variations of these strategies or an entirely different set of strategies. There are three major highlights from this discussion:

If you turned 40 already, it is time to be serious about saving for retirement. You cannot afford to wait any longer. Longer you wait, harder it will be to achieve your retirement goals. Compounding can do wonders to your savings, but it needs time. You need to set your retirement saving goals depending on your current income, spending needs and other personal factors. While saving on a regular basis is the first essential step, savings alone cannot meet retirement goals. The savings must grow on a consistent basis. In our example of a 25-year-old, saving for 37 years, contributions only accounted for about $200,000, whereas the balance $800,000 came from investment growth over 37 years. With an inflation rate of 2-3%, the average rate of growth of 8-9% is both realistic and achievable. Multi-faceted investment approach: Investments never move up or down in a straight line. Often, when one strategy zigs another one will zag. So, it is helpful to have a multi-faceted investment approach. Not only it helps in diversification, but it also lowers the volatility of the overall portfolio.

Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LYB, HCP, HTA, O, OHI, VTR, NNN, STAG, WPC, MAIN, NLY, ARCC, DNP, GOF, PCI, PDI, PFF, RFI, RNP, STK, UTF, EVT, FFC, HQH, KYN, NMZ, NBB, JPS, JPC, JRI, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.