If you follow a retirement planning guideline known as the 4% rule, you’ll want to retire with a portfolio that’s 25 times the amount you expect to draw from your accounts in your first year of retirement. If you follow that plan described by that guideline, you should be able to see your nest egg last at least through a 30 year retirement, while still adjusting your withdrawals for inflation every year. In that framework, a $2 million portfolio should be enough to completely replace an $80,000 salary.
That raises a great question-how do you build that $2 million nest egg on an $80,000 salary? After all, if you want to retire with that kind of portfolio, you need to be able to build it within your career. That’s easier said than done, but it is within the realm of possibility if you start planning early enough.
The math that gets you there
The following table shows how much needs to be invested on your behalf every month in order to get that $2 million nest egg. The key things it depends on are the average rate of return you earn and the number of years you have available to you to invest in order to get there.
| Years to Go | 10% Annual Returns | 8% Annual Returns | 6% Annual Returns | 4% Annual Returns |
|---|---|---|---|---|
| 45 | $190.80 | $379.18 | $725.70 | $1,324.97 |
| 40 | $316.26 | $572.91 | $1,004.28 | $1,692.11 |
| 35 | $526.79 | $871.89 | $1,403.80 | $2,188.83 |
| 30 | $884.77 | $1,341.96 | $1,991.02 | $2,881.64 |
| 25 | $1,507.35 | $2,103.00 | $2,886.03 | $3,890.08 |
| 20 | $2,633.77 | $3,395.47 | $4,328.63 | $5,452.94 |
| 15 | $4,825.44 | $5,779.71 | $6,877.14 | $8,127.10 |
Recognize how important starting early is when it comes to reaching that $2 million nest egg. If you start saving with your first paycheck, it’s pretty straightforward to reach that milestone by a typical retirement age. That holds true even if the market’s future annual returns don’t quite reach the same level of around 10% as they have historically. Wait until later in your career, and you’ll have to start depending both on higher returns and larger contributions to have a fighting chance of getting there.
You don’t have to get there alone
Notice how I wrote “needs to be invested on your behalf” above. That’s different from “you need to come up with out of your pocket.” It also showcases how you can take advantage of tools your boss and Uncle Sam might offer you to help you reach that goal easier.
Key among those tools is a 401(k) or similar employer-sponsored retirement plan. Money you sock away in those plans compounds tax-deferred while it remains in the plan. In a Roth-style plan, you can even pull your money out completely tax free once you reach a standard retirement age. On the flip side, in a Traditional-style one, you get an immediate tax deduction for contributing.
In addition to the tax benefits, many employers offer matching contributions to 401(k) plans, meaning if you contribute money toward your retirement, your boss will too. That combination of employer support and tax benefits can make it much easier for you to sock away enough to reach that $2 million nest egg by the time you retire.
How those benefits stack up
A typical 401(k) match is 50% of your contribution, up to 6% of your salary. Said differently, with that $80,000 salary, if you sock away $4,800 per year ($400 per month) toward your 401(k), your boss will add an additional $2,400 per year ($200 per month) toward your account. That instantly brings the amount contributed on your behalf to $7,200 per year ($600 per month), which is a great start on your savings journey.
In addition, if you contribute to a Traditional style 401(k), you get that immediate tax deduction. Say you’re in the 22% Federal tax bracket and a 3% state bracket. The tax deduction would knock about $1,200 per year ($100 per month) off the taxes you have to pay on your income. Put together the tax break and the employer match and $7,200 per year ($600 per month) is getting socked away on your behalf, at an out of pocket cost to you of only $3,600 per year ($200 per month).
If you start early enough in your career, that amount alone could propel you to that $2 million nest egg by the time you retire. If not, don’t despair. If you’re under age 50, you can save as much as $20,500 per year in your 401(k). If you’re age 50 or up, that limit jumps to $27,000.
Get started now to improve your chances of success
In addition, if you’re employed and under age 50, you can generally contribute $6,000 per year to similarly tax-advantaged retirement plan called an IRA. If you’re age 50 or up, the IRA contribution limits reach $7,000 per year. Between an IRA and a 401(k), you can sock away between $26,500 and $34,000 per year — plus whatever your employer match may be — in a tax advantaged way to help you reach your $2 million goal.
If even that’s not enough, you can save an unlimited amount in a standard brokerage account. Of course it’s important to note that $34,000 represents 42.5% of an $80,000 salary. If you’re able to sock that much away while you’re working, then do you really need to reach that $2 million nest egg to maintain your lifestyle in retirement?
Indeed, it’s much easier — and more practical — to start saving earlier in your career than it is to try to save a massive amount later in your working years to try to catch up. You’ll never again have more time before you retire than you do today, so get started now, and improve your chances of reaching that $2 million nest egg by the time you retire.
