Have $100,000? Here Are 2 Ways to Grow That Money Into $1 Million for Retirement Savings

Source The Motley Fool

The great Charlie Munger, who died in 2023 and formerly served as Berkshire Hathaway's vice chairman, always gave blunt financial advice to investors seeking his wisdom.

One key piece of advice was to find a way to save $100,000 to invest. "The first $100,000 is a b****, but you gotta do it," he once said during one of Berkshire's annual shareholder meetings in the 1990s. "I don't care what you have to do... If it means walking everywhere and not eating anything that wasn't purchased with a coupon, find a way to get your hands on $100,000."

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

Munger's main reason for obtaining $100,000 is due to the power of compounding and how it can turn a sum of money into a much greater sum over time. So, if you've completed this monumental achievement and managed to save $100,000 to invest, here are two ways to turn it into $1 million.

Set it and forget it

Munger and his pal Warren Buffett agreed that you don't have to be a genius to get rich if you have time on your side. In fact, Buffett often attributes his wealth to the fact that he's had many decades to invest. The earlier one starts investing, the better because returns compound and build off each other.

Now, obviously, it all depends on where you are in your life. Investors closing in on retirement may not have the same luxury as those with a full career ahead of them, and those early on in their careers may find it difficult to save $100,000 so young. But if you were able to invest $100,000 in the broader benchmark S&P 500 or the S&P 500 Equal Weight Index over the last 30 years, you would now be a millionaire.

SPY Chart

SPY data by YCharts

While the S&P 500 has long been deemed a safe and diverse place to put money for the long term, investors today may want to consider the equal-weighted index, especially if they don't have 30 years to invest, because the S&P 500 has become so concentrated with large tech and artificial intelligence names. Many of these stocks have done well, but it makes the index less diverse than it once was. If you didn't have 30 years to invest but only 15, you might not be a millionaire but you would still have significantly increased your wealth had you invested in these two indexes.

SPY Chart

SPY data by YCharts

Let dividends pay you passive income

Another investing strategy is to invest in strong dividend stocks that send shareholders money every quarter and sometimes every month. While dividends aren't guaranteed and depend on the financial health of the company paying the dividend, there are companies out there that have paid and increased their dividends for decades while also seeing their share prices appreciate as well.

Let's say you were to invest $100,000 into a stock or a handful of stocks and realize a collective annual dividend yield of 3%. If we also assume a quarterly payout, a 15% tax rate, a 6% annual dividend increase, and share price appreciation, your investment would surpass $1 million over 30 years.

Now, there are certainly higher dividend yields you can invest in, but often, an ultra-high yield can be a warning sign that the stock is at risk or the company is not financially stable. Dividend investors can look at several key metrics to determine the safety of a dividend and the potential to grow it. One is the dividend payout ratio, which looks at a dividend as a percentage of earnings. If this ratio is less than 100% of earnings, that means the company is generating enough profit each year to cover its dividend.

Another good one is free cash flow yield, in which you divide free cash flow (FCF), which is net cash from operations minus capital expenditures, by market cap or take FCF per share and divide it by the company's share price. If the FCF yield is higher than the company's dividend yield, that means it can pay the dividend from FCF generation.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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