Many people dream of retiring with $1 million. But in reality, a $1 million nest egg may not go as far as you'd think.
If you follow the 4% rule for managing your nest egg, a $1 million savings balance leaves you with $40,000 in annual income. That's a decent chunk of money, especially when you combine it with Social Security benefits, but you may not be living in luxury.
That's why you may want to aim higher than $1 million for retirement savings purposes. In fact, you may be setting your sights on $5 million in savings.
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But is that doable? You'd better believe it. And you don't even have to earn a massive paycheck to make a $5 million nest egg possible down the line.
It's all about consistent savings and savvy investing
If you want to retire with $5 million to your name, it's going to take a couple of things. First, you'll need to plan on funding a retirement plan for pretty much your entire career. If you wait until your 40s to start making contributions to an IRA or 401(k), you're less likely to get to that point.
Second, you'll need to go heavy on stocks in your retirement account, whether by purchasing shares individually for your IRA or loading up on stock-focused index funds in your 401(k). Though owning stocks does come with risk, the stock market has a strong history of rewarding investors who stick with it for decades.
Let's say you earn $80,000 a year and start saving 12% of your salary, or $800 a month, for retirement, beginning at age 22. (Based on today's plan limits, $9,600 a year is more than what you can put into an IRA but much less than the maximum for a 401(k) plan.) Let's also assume your investments deliver an average annual 9% return during your savings window, which is pretty much in line with the stock market's average.
In that case, by age 67, which is full retirement age for Social Security purposes for people born in 1960 or later, you'll have a nest egg worth just over $5 million. While parting with $800 a month on an $80,000 salary isn't the easiest thing, it's also not unreasonable if you're willing to live below your means.
You'll notice that this example assumes you'll earn the same amount of money and contribute the same amount to your retirement plan year after year for 45 years. Your income might rise nicely during your career, giving you more opportunity to ramp up your contributions and grow an even larger balance.
It can definitely be done
Amassing a $5 million nest egg is something that can be done -- if you're willing to commit to that goal early on. It's not easy to set aside money for retirement in your 20s when that milestone is so far away. But if you push yourself to make those contributions at a young age while going heavy on stocks, you may be amazed at how much wealth you'll be able to kick off retirement with.
