Take more risk for a bigger retirement payoff

By Charles Fishman

There is some delightful news hidden in all the concern these days about the stock market, investing and personal finance: You may still become a millionaire.

Not you in general, but you, the man or woman reading this right now. It doesn't require winning the lottery, or having 10,000 stock options in a soaring IPO that doesn't subsequently crash (although that doesn't hurt). It doesn't even require extraordinary saving and the self-denial of never eating out, of wearing last season's Banana Republic colors or becoming a coupon-clipper.

But here's the disappointing news: Having a million dollars not only isn't going to solve your problems, it isn't even going to solve your financial problems. Having $2 million -- you might well get there, too -- will certainly be better, but even that kind of nest egg won't leave you carefree.

Still, before we start feeling inadequate because we have only $2 million (or because we don't have $2 million), let's pause briefly to explain how you're going to become a millionaire. In fact, for a whole swath of middle- and upper-middle-class Americans, seven-figure savings may soon be routine. They will also be essential.

Indeed, if you had $25,000 15 years ago, had been reasonably diligent about keeping that money invested and adding to it through a 401(k) plan, and then avoided the worst of the recent bear market, turning the $25,000 into $300,000 would have required returns of only about 60% of what the stock market delivered during that time.

So how do you take the leap from $300,000 to $1 million? Or maybe just $30,000 to $100,000? And what should would-be millionaires worry about? Here are six surprising facts:

• To become a millionaire, do nothing.

• Don't diversify.

• You only need 5% to make your money last forever.

• Retirement won't be cheap.

• You can't retire on $1 million, or even $2 million.

• You're never too rich to save.

And what if you're just starting out and your nest egg is only $25,000 rather than $250,000? Most of the following applies to you, too.

1. To become a millionaire, do nothing.

Or, at least, do nothing differently.

"There's nothing particularly magic about going from $30,000 to $300,000 over 15 years," says Eleanor Blayney, a financial planner in McLean, Va. "Whatever strategy got you to $300,000, probably that strategy is going to take you to the next level."

Let's say you're 40. You and your spouse have $400,000 in savings through IRAs, 401(k)s, brokerage accounts, college-savings accounts -- everything but the equity in your house. Without adding a penny of additional savings, that $400,000 will become $1.9 million in 15 years, if you earn a 10.5% return (compounded quarterly) -- and 10.5% is what the stock market has averaged each year over the last 70 years.

The numbers are just as persuasive if you're 25 and have $30,000. By the time you're 40, the $30,000 becomes $144,000, if you do nothing but invest it and get an average return. (But no 25-year-old should be ignoring the power of saving. You need to be adding to the $30,000 every year. More about that below.)

2. To get really rich, don't diversify.

At least, don't diversify too much. We know this isn't advice you hear from most financial planners, but it's gaining popularity.

"Great wealth comes from undiversified risk," says Ross Levin, a financial planner with Accredited Investors in Minneapolis. "Bill Gates didn't get rich by selling Microsoft stock and buying other things. If you spread out your investments too thinly, the diversification drags down the return, as opposed to enhancing it."

How powerful are individual stocks?

• If you had put $10,000 into MSN Money publisher Microsoft in 1990, that $10,000 would have been worth about $500,000 at the end of 2004, despite the market's long struggle;

• $10,000 in CNBC parent General Electric's stock in 1990 would have been worth roughly $90,000;

• And if you had put $10,000 into Cisco Systems when it went public in 1990, you'd have had more than $2 million.

It doesn't take too many returns like these to build a retirement portfolio. But stocks go down, too. And you could just as easily have put $10,000 bets on companies such as Enron or Kmart. In those cases, you'd be lucky to have any of your money left.

Peter L. Bermont, a senior vice president at Salomon Smith Barney who with his brother handles more than $1 billion running the Bermont Group in Miami, specializes in making the kind of targeted investments that can pay off big. Despite the size of the assets he manages, Bermont puts all his clients in the same 10 stocks. It's a strategy he thinks individual investors with some tolerance for risk can adapt.

"I'm a concentrated investor," he says. "I will put more money into fewer situations. Whereas many managers with $400,000 in an account would buy 50 stocks, I'll buy 10. My theory is: If you do the research, it's not necessary to spread it out."

This kind of investing isn't for the faint-hearted. In fact, it flies in the face of most conventional investment counsel. But Bermont's point is this: Pick a sector you think is going to do well, do some research and place a couple or three bets on the well-positioned companies in that sector.

With a $400,000 portfolio, you can place bets of $10,000 in 20 stocks. (Remember, we don't have the time or research resources that Bermont does.) If you pick a couple of winners, the performance of the rest almost doesn't matter. And you still have $200,000 for more-cautious mutual fund and index fund investing.

Bermont, mind you, doesn't go for unproven, baby stocks. Five years from now, he says, perhaps "two or three" of his current list of 10 stocks will have changed. "We buy and hold with strong growth stocks."

Moreover, Bermont's entire strategy is easily adapted to mutual funds, which softens the risk considerably.

3. You only need 5% to make your money last forever.

"Do I have enough money to retire now?" The question always makes Eleanor Blayney laugh. "Can you retire?" she asks. "You tell me." The answer depends on you, and how much you need to live on.

Blayney's rule of thumb, shared by other financial planners, is that you can pay yourself 5% of whatever your "personal endowment" is and in the process leave your principal holdings untouched. (The 5% is the same figure many foundations and universities use when calculating how much income from their endowments they can use each year.) That doesn't include money you ultimately might receive from a corporate pension or Social Security.

So if you have $1 million, you can count on taking out $50,000 a year. On average, the million will grow more than 5% -- enough to provide the $50,000, and to throw off enough so the endowment and the payout both keep pace with inflation.

"Is $50,000 a get-out-of-town lifestyle?" asks Blayney. "No, for most people, it's not."

Of course, it's not absolutely necessary to preserve the capital off which you're living. Many people don't feel any particular need to pass a large estate on to their children or grandchildren, and so could pay themselves more in retirement while gradually whittling their nest egg down. This involves tremendous daring, though. You have to guess how long you're going to live. If you miscalculate, you could run out of money.

4. Retirement won't be cheap.

It's an accepted truth with many people that living as a retiree is cheaper than living as a working person.

"That's horse puckey," says Deena Katz. She's a financial planner in Coral Gables, Fla., who is good at bringing a dose of reality to people's fantasies about retirement.

The idea that retirement costs less than "normal" life, for instance, "assumes that when folks retire, they move to Florida and sit in a rocking chair on the porch until they die," says Katz. Few people do that anymore.

Katz is among a growing cadre of planners discovering that people don't want their lifestyles to suffer in retirement. Baby boomers who retire want to travel, get involved in hobbies like gardening (and investing), eat out, keep their homes, and entertain guests and relatives on a regular basis. So why would they spend less money? Indeed, their retirement could be more expensive than their work years.

"To go see their own kids and their grandkids these days, most people have to take an airline flight," says Katz. "Just getting to see the family is more expensive than it used to be."

Then there's the large number of "late starters" on the family front. A number of 40-year-old couples have managed to accumulate $400,000 in part because they've only just started having children.

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