I’m 25, how do I save $1 million by the time I’m 40?

If you’re in your mid-20s and reading this, congratulations. You’re showing a kind of forward thinking and ambition that few people possess.

Did you know that fewer than one in 10 Americans have a net worth over $1 million? Although it's not easy to reach that million dollar mark, it's far from impossible.

So, what strategies do those who achieve this goal employ? And more important, how can someone in their mid-20s save and invest in a way that allows them to reach $1 million by the time they turn 40?

Hint: It doesn't necessarily involve going all-in on stocks.

Instead, this balanced approach relies on the tried and tested 60/40 investment portfolio.

If you’re unfamiliar, don’t worry. By the end of this article, you’ll understand what a 60/40 portfolio is, how to implement it in practice, and most important, the amount you need to save each month to join the millionaire’s club.

What’s a 60/40 portfolio?

A 60/40 portfolio is an investment strategy that consists of two primary asset classes: stocks and bonds. The method involves allocating (or investing) 60% of your portfolio (investment account) into stocks and 40% into bonds.

It is one of the most popular long-term investment strategies and it has dominated wealth management in recent years.

Accounting for risk

In the context of finance, risk often refers to volatility. Volatility is the degree to which the price of a security, like a stock, fluctuates over time. Specifically, it’s a statistical measure of the dispersion of returns around the mean (average) price.

In other words, volatility is the amount and rate at which an asset’s price will likely change over a specific period.

Volatility matters because, all else equal, it’s better to choose an investment with lower risk because it possesses a greater chance of persisting along a steady performance track.

For example, which stock would you prefer to invest in, if the following was the only information you had?

• Stock A: Expected to return 15% over the next 12 months with a volatility of 25%.
• Stock B: Expected to return 15% over the next 12 months with a volatility of 10%.

Without knowing anything else, most people would easily select stock B. It delivers the exact performance expectations as stock A but with less risk.

Again, in this context, risk refers to the likelihood a security will deviate from its average price at any given time. As a result, lower volatility is preferred to limit fluctuations in your investment account.

Why the 60/40 portfolio?

The 60/40 breakdown is not arbitrary. The allocation is used because it offers impressive risk-adjusted returns. This means the portfolio has produced reasonably high returns with minimal risk.

This risk-adjusted return is achieved by combining the two primary asset classes, each with its own unique characteristics:

• Stocks provide investors exposure to a higher expected performing asset but with higher expected volatility.
• Bonds provide investors exposure to a lower expected performing asset but with lower expected volatility.

The combination of stocks and bonds delivers investors a mixture of riskier and safer assets. Moreover, these two asset classes are negatively correlated, offering portfolios the benefit of diversification.

This means the assets usually won’t move in lockstep with each other; when the stock market crashes, the bond portion of the portfolio may be rising.

While this phenomenon often holds, it isn’t always the case. In 2022, both assets fell dramatically in relative unison. Nothing is guaranteed.

How do you save $1M in 15 years?

If you’re 25 years old and want to save $1 million by 40, consider making regular contributions to a 60/40 portfolio.

Looking back at the 60/40 portfolio between 1976 and 2023, we see that, on average, the strategy earned 8.1% each year. Assuming that rate of return, you would need to save $2,919 each month to reach $1 million in savings by the time you hit 40.

Of course, there’s no guarantee historical performance will repeat itself. Nevertheless, the best we can do is make an informed decision based on the information we have.

Why not 100% stocks?

If stocks are considered the better-performing asset over time, why not allocate 100% of savings toward equities?

It comes back to risk. While a 100% stock portfolio performed better than the 60/40 strategy between 1957 and 2023, it came with increased volatility.

The 60/40 portfolio experienced annualized volatility of 9.7% over the period. In contrast, the 100% stock allocation saw volatility of 15.1%, or over 50% more risk.

At the same time, an all-bond portfolio only had 5.4% volatility during the period in question. While this represents roughly a third of the risk of the all-stock portfolio, it comes with a less impressive annualized return of 6.6%.

If we plug this rate of return into the model, it would require a savings of $3,320 per month to reach $1 million in 15 years, roughly $400 per month more than the balanced 60/40 portfolio.

Implementing the 60/40

There are numerous ways to implement a 60/40 investment strategy. The following is a high-level example of how one might employ the approach using exchange-traded funds (ETFs).

1. Select a brokerage: If you don’t have an investment account, research and find a brokerage that fits your needs. Ensure the platform offers ETFs.
2. Open an account: Sign up with the platform and provide necessary financial details and personal information.
3. Fund your account: Transfer money to the investment account from your bank account. This can represent one month’s worth of savings or more.
4. Select your ETFs: Choose one ETF to represent the broad stock market, like the Vanguard Total Stock Market ETF ($VTI), and one to represent the bond market, like the Vanguard Total Bond Market ETF ($BND).
5. Setup automatic investment: Most platforms will permit you to set up automatic monthly purchases of specific amounts. For example, direct $3,000 to be transferred from your checking to your brokerage account each month and invest 60% into VTI and 40% into BND.
6. Monitor and rebalance: Without any intervention, over time, your actual holding allocation will likely drift away from their 60/40 weights. This deviation occurs because one asset outperforms the other, growing in relative size. That’s why it’s essential to review your account periodically (say every six months) to rebalance it back to target. This means selling the overweight security and buying a corresponding amount of the underweight instrument.

Moving forward

While a 60/40 portfolio is considered one of the best investment strategies for growing wealth over a long time horizon, it isn’t guaranteed—nothing is.

Asset characteristics can evolve and change depending on the market environment.

Staying informed is key as you monitor your portfolio over time. Even better, consider speaking with a financial advisor if you have questions about the suitability of the strategy for your portfolio.