Today’s post is a guest post from one of my fellow blogger friends. He’s got lots of great posts, so after reading this one here, be sure to check out his blog via the link below. He is also one of the bloggers featured on my Resources page!
Hello, my name is David and I run Zero Day Finance, a blog dedicated to helping you control your spending with the ultimate goal of achieving financial independence. I recently wrote a post about the many paths to $1 million. $1 million is the typical retirement target. With $1 million, you can safely generate $40,000 per year in investment income forever. Combine this with Social Security, and you’ll live a very comfortable retirement. In this post, I’ll show you exactly how to hit a $1 million net worth regardless of your investment timeline.
The Road To $1 Million Is Difficult
Hitting a $1 million net worth is not easy. With the average US income of $38,000 and the median household income closer to $55,000, it may seem completely out of reach for the average person. For people without a plan, this is true. Hitting this milestone requires planning and time. Most likely decades. But this goal is worth the wait, it is worth all of the hard work that you will pour into it. The only thing stopping most people is the lack of a plan. Before, I mentioned that $1 million will provide a comfortable retirement with Social Security. $1 million will generate $40,000 per year in income in perpetuity. The reason for this is the Trinity Study. Basically, you invest your portfolio in a combination of stocks and bonds, and live off your investment gains. Most people who do this will comfortably live off their gains, and pass on a sizable inheritance to their children.
The Power Of Compound Interest
The “secret” to building a $1 million nest egg isn’t a secret. It is simple math that you learned in high school. Compound interest is the key to building up your nest egg. With as little as $12 a day, you will hit your milestone. The longer your investment horizon, the less money it will take to hit $1 million.
42 Year Horizon
The average person will start working around age 23 and retire at 65 — if they are lucky. More and more people wait until they are 70 years old to retire, including my dad. This is because the Social Security payout increases by 8% each year you defer. But let’s assume that we are going to work from age 23 to age 65. This means that we have a total of 42 years to grow our nest egg. Assuming a 7% real rate of return, you need to invest $11.89 cents every day for 42 years. This is doable for the majority of people. To put this in perspective:
- $11.89 per day
- $82.23 per week
- $368.59 per month
- $4,339.85 per year
- $182,273.70 in 42 years
Over the 42 years that you invest, you will have contributed $182,273.70. However, your net worth will be approximately $1,000,943. Compound interest essentially multiplied your investments by 5.
30 Year Horizon
Many people who want to retire early do so in their 50’s. This means they invested for 30 years or so. When you invest for 30 years, you still gain a significant advantage from compound interest. However, you will not see a 5x investment gain. To build a $1 million nest egg in 30 years, you must invest $29.01 per day. To put this in perspective:
- $29.01 per day
- $203.07 per week
- $899.31 per month
- $10,588.65 per year
- $317,659.50 in 30 years
Investing $29 per day is significantly harder than $12. By trying to retire 12 years earlier, you have to more than double your contributions. Those extra 12 years of compounding interest did a lot of work for your portfolio. In this scenario, your investments were multiplied by about 3.
20 Year Horizon
As FIRE (Financial Independence, Retire Early) became more mainstream, a lot of high income individuals realized that they could retire with 20 years. This is my time horizon. I’ve been investing since I was 23, and I hope to retire by about 40, give or take a few years. Building a $1 million nest egg in 20 years is very difficult, even for people who earn 6 figures in a year. To do this, you must invest $66.85 per day. To put this in perspective:
- $66.85 per day
- $467.95 per week
- $2,005.50 per month
- $24,400.25 per year
- $488,000 in 20 years
For most people, investing $66.85 daily for 20 years is simply impossible. I can tell you from my first hand experience that it is definitely doable if you make $80,000+ per year, but this income is extremely uncommon. Over the 20 year time period, your investment has only increased by a factor of 2. We can see that it requires a significant amount more money to retire in 20 years vs. 42. Spreading out your net worth growth over 42 years affords you a significant advantage.
10 Year Horizon
Building a $1 million nest egg is not for the faint of heart if you only have 10 years to invest. This type of retirement is only for super high earners. To show you why, it will take $198.36 invested every single day for 10 years for you to build up your $1 million nest egg. To put this in perspective:
- $198.36 per day
- $1,388.52 per week
- $5,950.80 per month
- $72,400 per year
- $724,000 in 10 years
As you can see, building a $1 million net worth in 10 years is impossible for most. To do this, you need to save more than $72,000 per year which is almost double the average pre-tax income. Even with a 50% savings rate (which is extremely rare), you need to earn $145,000 post-tax per year which puts you in the top 2-3% of the US income.
Thoughts On Building $1 Million
Building a $1 million net worth is obviously not impossible. Given 42 years, all it costs is $12 a day. Even on a minimum wage of $60 per day, this is possible. It just takes time, determination, and a little bit of pain. If you are lucky and make an income closer to $60,000 or even $70,000 per year, you have an important choice to make: do you enjoy life now and make a small sacrifice to become a millionaire at 65, or do you tighten your budget and try to achieve FIRE in 30 or even 20 years? For me, I set a goal of retiring in my early to mid-40s. I try to hit a savings rate of about 56% of my post-tax income. I am to invest $100 per day towards my retirement. I rarely hit this goal, but setting difficult goals and sometimes achieving them is much better than setting trivial goals and celebrating every night.