Saving up a financial nest egg to fund your lifestyle beyond your working years is one of the most important things you'll do, even if you're young or don't yet realize how important this is.
People's financial situations are like snowflakes -- no two are quite the same, which is why it's personal finance. But it can still be enlightening to see different scenarios of how one might grow their retirement savings from a hypothetical $100,000 start into $1 million.
The key lessons from these examples can help you put a plan in place to ensure you'll enjoy your golden years too.
Why $100,000?
We all start somewhere. Some people start early, while others don't take retirement seriously until their hair turns gray. The average American aged 35 to 44 has $131,950 saved for retirement, according to data from a 2019 Federal Reserve consumer survey.
Someone might be ahead of the game at 30 years old with $100,000 already saved. Perhaps someone else is starting late and has just $100,000 by their 45th birthday. What if someone had a midlife setback and is 52 and must scramble to quickly multiply their savings over the next decade? Here's how each of these scenarios could pan out.
1. Meet Beth
Meet Beth, our hypothetical super-saver who amassed a $100,000 nest egg by her 30th birthday. That was no easy task, given the cost of student loans, rent, and living expenses. But if you can pull it off, you have a tremendous financial advantage as you'll see below.
Imagine that Beth puts her retirement into low-cost index funds that track the S&P 500. Historically, the index has returned an annual average of 9.4% over the past 50 years.
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Beth can coast to a million-dollar nest egg. She doesn't need to contribute another dollar! Simply achieving historically average market returns should grow her $100,000 to $1 million in 26 years, her 56th birthday. She can likely retire early or continue contributing to a far larger nest egg by the time she's older.
It might be too late for you to get a head start like Beth did, but if you're reading this as someone in your teens or twenties, you can make your journey much more manageable by saving early and often.
2. Meet John
Next up is John, a hypothetical family man in the prime of his career. John makes good money, but he got married, bought a house, and had kids -- the natural life progression that can sometimes put you behind on your retirement savings. Unfortunately, John won't have it as easy as Beth, but there is still plenty of time to take action.
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Assuming John has $100,000 saved by age 45, he can still grow his savings to $1 million by age 65 if he can contribute an additional $620 monthly to his portfolio (also invested in an S&P 500 index fund). That's no small task, so he may have to make sacrifices to his lifestyle and spending to make that happen.
Still, you can attain that million-dollar retirement portfolio with enough dedication. Assuming John earns a $64,116 salary, the median income for a 45-year-old American, that $620 each month equates to a roughly 12% gross savings rate.
3. Meet Brian
Meet hypothetical Brian, who has had a bit of a rough journey in recent years. His retirement planning was on track, but he suffered a setback after a personal crisis forced him to drain much of his savings. He is 52 and has $100,000 saved, well behind where he should be.
Image source: Getty Images.
Brian can still retire a millionaire by age 65, but it will cost him far more than the others, about $2,400 monthly. That's a high bar, but hopefully, he doesn't have a lot of consumer debt or a big car payment. It's the most challenging path, but a solid retirement is still realistic. Brian can choose to work a few extra years into his late sixties if he can't put enough money together. Working until age 68 would allow Brian to reduce his monthly contributions to $1,500 and still reach retirement with $1,000,000.
Finance is ultimately about numbers and math. Don't underestimate what you can accomplish just because you got a late start or hit some roadblocks in life. Everyone should strive for a well-funded and happy retirement, so crunch those numbers and devise a plan that can get you there.
