If you retire on Social Security alone, you may have to cut back on spending significantly compared to your working years. And while you may be prepared to do that to some degree, you probably don't want to do that to an extreme. That's why it's best to save a bundle for retirement -- so you're able to live the lifestyle you want without worry.
Of course, the amount of savings you should aim for will hinge on your specific lifestyle and goals. A more modest existence may only require $500,000, while a retirement filled with travel and dinners at nice restaurants could require more like $2 million.
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That's right. If we use the 4% rule, $2 million in savings gives you an annual income of $80,000, plus whatever Social Security pays you. And it's conceivable that it might take an income that size to be able to live in a vibrant city and enjoy its amenities.
Now you may be thinking, "Well, that sure sounds nice, but it's not going to happen for me."
But before you write off $2 million as an unattainable savings target, you should know that it may be easier to save that amount than expected. Here's how you can build a $2 million nest egg -- without necessarily breaking a sweat.
1. Start early
When you're looking to grow a large amount of wealth, the best thing you can do is give yourself time. The more years you're investing your money, the easier it is to take advantage of compounded returns.
It's not the easiest thing to start funding a 401(k) or IRA in your 20s, when you're first earning a paycheck. But if you manage to start at a fairly young age, you may be more likely to meet your goal.
2. Create a diversified portfolio
Branching out in your portfolio could protect your savings from losses during periods of stock market volatility. It could also fuel your savings' growth.
If hand-picking an array of stocks is not in your wheelhouse, fall back on S&P 500 index funds instead. It's a strategy many savers adopt because they don't have the time or knowledge to choose individual stocks on their own. But it's a great way to get instant diversification.
3. Stay invested as long as possible
You may already be thinking of retiring in your 50s instead of waiting until your 60s or beyond. But holding off on tapping your savings for an extra decade could lead to a lot more wealth.
If you're feeling burned out career-wise by the time your 50s arrive, don't automatically retire. Instead, do a career pivot. Find work that's less stressful and more meaningful. You don't necessarily have to bring home the largest paycheck. You just need to earn enough so you're able to leave your savings alone.
Putting it all together
At this point, you may be thinking: "Well, thanks for the tips, but how does that get me to $2 million?"
So let's incorporate some numbers. Let's say you start saving $500 a month at age 23. Let's also say you load up on S&P 500 index funds that deliver an average annual 8% return, which is a touch below the stock market's average. If you keep that up until age 67, which is full retirement age for Social Security for someone your age, you could end up with $2.1 million to your name. Really.
Of course, you may not need $2 million to retire comfortably. The point, however, is that the path to getting there may be easier than you'd think. So don't be too quick to write off the idea of a multi-million-dollar nest egg.
