How Can You Retire With One Million Dollar ($1,000,000) in Your Nest Egg?
Math Breakdown
The math is actually not that hard. Let’s assume you start working at age 22 and you work for 40 years until you’re 62. If you save $311 a month, which comes out to be $3,732 a year with a theoretical 8% average annual return on your investment, you will have $1,001,755.68 in 40 years. Not bad at all.
The math is the easy part; the doing is the hard part. If you’re making $35,000 a year, $3,732 is 10.66% of your annual income. If you’re making $40,000, it’s only 9.33%. Most of us should be able to save at least that much towards retirement. If you’re not able to, you will need to figure out how to budget your expenses better and/or make more money.
What happens if you save just a little bit more? Let’s say $350 a month, which is $4,200 a year, you would end up with $1,127,377.77 after 40 years. That’s an increase of $125,622.09 in your nest egg for just $39 more per month for a total of $18,720 over the course of 40 years. The point is, every little bit that you can save per month towards retirement will add up to something big over time.
Need more motivation? Let’s say you save a nice round number of $400 a month, that’s $4,800 a year. This would net you close to 1.3 million, $1,288,431.74 to be exact with 8% annual returns. Are you excited about saving yet?
What happens when you save $500 a month, or $6,000 a year towards retirement? Your nest egg takes a pretty big leap to over $1.6 million over the course of 40 years.
The key is to start early, you can even start saving and investing before you graduate college (typically around age 22). If you really want to get a head start in the retirement saving game, you can start working as a teen and invest in your earnings if you’re ambitious. Most places will hire 16-year-olds to work and it is possible to get $12-15 jobs even as a teenager.
The nest egg retirement numbers are not pretty for most Americans, I hope you won’t be part of that statistic.
What Happens If I Get Lower Returns on My Investments?
Let’s say you don’t get the theoretical returns but instead only gets 7% of annualized return per year. Using the same savings per year, $311 a month would still net you $768,649.56 after 40 years. Not quite a cool $1,000,000, but still a lot of money that you can probably make it work in your retirement. It’s certainly better than $70,000 (or less) that many Americans have saved up in their mid to late 60s.
If you are able to save $350 a month, then the nest egg jumps to $865,039.70 over 40 years, again, not the cool $1.1 million, but still a nice chunk of change that will last you a while deep into retirement, if it’s managed well.
If you can save $400 a month, you would come real close to $1,000,000 in retirement ($988,616.80)
If you save $500 a month, you would have over $1.2 million ($1,235,771.00).
How Long Will My Nest Egg Last?
This will depend on how much you spend and how aggressive your portfolio is at this point. A lot retirees are more risk averse, so they go from growth-focused strategy to mere income generation or preservation, so something like 60% stocks and 40% bonds breakdown. If you try to be more conservative with your growth, you will also have to be more conservative with your spending.
So if 60% of your portfolio is stocks and you get 8% return on a $1,000,000 portfolio, that portion of your return is $48,000 a year ((0.6 * $1,000.000) * 0.08). Your bonds portion of the return is probably going to be around 3% annually, so 0.4*$1,000,000 * 0.03 = $12,000. So your total return on an average year will be around $60,000 or 6% on this particular portfolio. So I would recommend not to withdraw more than $40,000 to $50,000 per year if you want to make this money last.
If you continue to live under the growth rate, the money can theoretically last forever or even grow over time! $40,000 of income from your nest egg plus $20,000-$25,000 of social security (if it’s still around by the time you retire), should be enough for most Americans to live off of, with again, good financial management skills.
How Much Should I have in Savings?
Withdrawing $40,000 a year is 4% withdrawal rate. It is possible you may have to withdraw less on the years that the market isn’t doing as well, or if the bonds don’t yield the typical 3%. Most experts recommend having 3-6 months of living expenses in cash savings. If you want to be safe, it’s much better to have 12-18 months of living expenses in your bank account. If you’re retired, you might want to be more extreme and have over 24 months of living expenses saved up.
Sometimes it takes the market over 12 months to recover if a major event hit (like the Great Recession of 2008). So when the market goes into a big downturn, you really don’t want to take out your money during those times. It’s like a double whammy.
Stocks that lost value in a downturn are just unrealized gains/losses, but if you sell the shares for living expenses, you won’t get to reap the rewards when the market recovers, and those shares are permanently lost. The double whammy is, that you’ll have to sell more shares than usual to cover your withdrawal amount.
This is why I recommend having at least 24 months of savings in your bank account weather this type of storm. When the market returns to the growth cycle, you can withdraw more than the usual amount to replenish your savings in preparation for the next recession or worse yet, depression.
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Math Breakdown The math is…