The Sleepwalking Millionaire
By Shannon Zimmerman February 9, 2007


A million dollars seems like a lot of money because, well, it is a lot of money. Thing is, racking up that sum isn't nearly as difficult as most folks imagine. Indeed, after putting just a few sound financial principles into action, you can basically sleepwalk your way to financial independence. Here's a two-step plan (pun intended) for doing just that.

1. Take maximum advantage of your company-sponsored retirement plan.
The 401(k) contribution limit for tax year 2007 weighs in at a hefty $15,500. Even if you can't kick in quite that much, do everything you can to contribute enough to take full advantage of your employer's matching contribution, if one is provided. Hey, that's free money -- and because your contributions will be automatic, once you set the wheels in motion, they'll just keep turning without additional work on your part.

And just how far will those wheels take you? Quite a long way. A 40-year-old who kicks in $10,000 each year between now and age 62 will have more than $760,000 if her investments match the S&P 500's historical rate of return: 10.5% annualized.

Not too shabby, eh?

2. Fully fund a Roth IRA and watch the taxman vanish.
Impressive though the figure above is, you still have some work to do if you want to be a millionaire by the time retirement rolls around. Enter the Roth IRA. Set one of these puppies up, kick in the maximum each year ($4,000 for 2007), and voila: At the end of 22 years, you'll have nearly $305,000 at 10.5%. And get this: Uncle Sam won't expect a dime on the withdrawals, either.

That deal is sweet indeed, particularly since, unlike with your company-sponsored retirement plan, you're in the driver's seat. You might choose to invest in individual stocks, bonds, or -- if you're looking for a no-muss, no-fuss vehicle -- mutual funds.

Indeed, world-class actively managed funds make great candidates for IRAs because you won't have to pay taxes on the capital gains and dividends they generate. Still, even if you opt for a "no-brainer" lineup of index picks, you can improve your odds of earning a rate better than 10.5% -- and of becoming a sleepwalking millionaire even sooner. For example, the iShares Russell MidCap Value (IWS) ETF -- which counts Entergy (NYSE: ETR), American Electric Power (NYSE: AEP), and Kroger (NYSE: KR) among its holdings -- tracks a benchmark that cranked out an annualized return of nearly 17% for the five years that ended with January 2007.

Meanwhile, MidCap Value's bigger brother -- the iShares Russell 1000 Value Index (IWD) -- has managed "just" 12% annualized over that stretch of time. Investors who track this benchmark are hitching their wagons to comparatively buttoned-down overachievers such as Merck (NYSE: MRK), Bank of America (NYSE: BAC), and Time Warner (NYSE: TWX).

No matter which way you go, the bottom line with Roth IRAs is this: The market is your oyster. Feel free to pick pearls -- and watch 'em grow tax-free.