If you begin investing at age 45 instead of age 40, how much more do you need to invest per month to have $1M at retirement?

Answer:

There are three extremely important elements when it comes to investing your money: the amount you contribute each month, the rate of return and how long you have to reach your goal. Keeping this in mind can help you invest your way to financial independence, regardless of how that looks for you — even if it means having $1 million.

Select previously asked Brian Stivers, a Financial Advisor and Founder of Stivers Financial Services, to help us calculate how much money 40-year-olds should invest each month to have $1 million by age 65. He also crunched the numbers to help us figure out how much people would have to contribute each month to become a millionaire if they waited just five years after turning 40 to invest. Here's what we found:

How much a 45-year-old needs to invest to become a millionaire

When making calculations, Stivers accounted for three different return rates: 3% (a conservative portfolio of mostly bonds), 6% (a combination of stocks and bonds) and 9% (a portfolio that's stock-heavy or contains index or mutual funds yielding around 9% on average). And, he used a retirement age of 65, which would give 45-year-olds just 20 years to save. Here's how much 45-year-olds would need to invest each month to become a millionaire by the traditional retirement age:

If making investments that yield a 3% yearly return, a 45-year-old would have to invest $3,100 per month to reach $1 million by age 65.

If they instead contribute to investments that give a 6% yearly return, they would have to invest $2,200 per month for 20 years to end up with $1 million.

But if they choose investments that yield a 9% yearly return, which is comparably more aggressive, they would need to invest $1,600 per month for 20 years to reach $1 million.

If you were to start investing for a 9% yearly return just five years earlier at age 40, you would need to contribute $950 per month to reach $1 million by age 65. That means contributing $650 less per month than you'd have to contribute if you wait until age 45.

The earlier you start investing the less money you have to contribute to your investments to reach $1 million. This is because compound interest is most powerful when it has a longer amount of time to grow your money.

Depending on your circumstances, making such aggressive contributions may feel like a squeeze. Especially since as you get older you may take on expenses that you didn't have when you were younger, like raising a child, caring for aging parents, making life insurance payments, or even paying tuition for children who are ready to head to college.

All these costs can make it difficult to simultaneously make aggressive contributions to your investments. However, keep in mind that even making smaller contributions can grow and potentially have a profound impact on your financial situation over time. Starting with something is more impactful and puts you in a better position than if you were to not invest at all.

So even if you can't afford to invest $1,600 a month, the sooner you start investing what you can, the more time compound interest has to work its magic.

If you're very new to investing or your income varies so you don't know how much you can comfortably afford to invest, you might consider an app like Acorns, which allows users to invest the "spare change" they accrue from making everyday purchases like coffee, textbooks and clothing. In other words, you're investing using the change from purchases you were going to have to make anyway.

And if you have some money to invest but can't afford a full share of the companies you're interested in, other apps like Robinhood allow you to invest in fractional shares. A fractional share is a portion of a stock's share based on the amount of money you want to invest rather than the number of shares you want to purchase — with as little as $1. This way, you can still get some skin in the game.

But if you're more comfortable with a hands-off approach, some apps, like Wealthfront and Betterment, use robo-advisors to help you determine which investments make sense for you based on your risk tolerance, goals and retirement date. Robo-advisors also take on the task of automatically rebalancing your portfolio as you get closer to the target date for your goals (be it retirement or buying a house). This way, you don't have to worry about adjusting the allocation yourself.

It's also important to note that when investing in stocks, you shouldn't just throw your money at random individual stocks. A tried and true strategy is to invest in index funds or ETFs that track the stock market as a whole, like the S&P 500. According to Investopedia, the S&P 500 has historically returned an average of 10% to 11% annually, so you might expect a fund tracking this index to produce similar returns. Also note that past returns do not guarantee future success.

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