Workers are encouraged to save for retirement independently and not fall back on Social Security benefits alone. Since those benefits only replace about 40% of an average wage, retiring without personal savings would mean taking a massive pay cut.
Data from an Employee Benefit Research Institute analysis of retirement accounts from the 2019 Survey of Consumer Finances finds that almost 50% of Americans have no money set aside for retirement. By contrast, about 4% have between $500,000 and $999,999.
There are also those who have several million dollars in savings for their senior years -- but it's a really small percentage. In fact, only 0.1% of U.S. savers have a nest egg worth $5 million or more.
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You might assume that the people who have $5 million IRAs or 401(k)s are those who earned high salaries throughout their careers. But actually, it's more than possible to retire with $5 million on a pretty modest wage.
How to build a giant nest egg on a smaller income
During the second quarter of 2023, the median weekly wage was $1,100, according to the U.S. Bureau of Labor Statistics. That's an annual wage of about $57,000.
If your income is somewhere in that vicinity, it may not be possible to part with 15% or 20% of it for retirement savings purposes, even though you'll often hear that it's wise to try to save that large a percentage of your earnings.
But what if you were able to sock away 10% of that income, or $5,700 a year, for retirement? Would that get you to a $5 million nest egg? Let's find out.
Over the past 50 years, the stock market has delivered an average annual 10% return, as measured by the performance of the S&P 500. If you were to save and invest $475 a month ($5,700 a year divided by 12) at an average annual 10% return over a 47-year period, you'd come away with about $4.97 million -- so not quite $5 million, but extremely close. And if you were to save and invest that $475 a month for 48 years, you'd end up with almost $5.5 million.
What would it take to be able to save and invest for 47 or 48 years? Well, you'd need to start socking money away for retirement as soon as you start working full-time. But for many people, that happens post-college in their early 20s. So it's conceivable that you might start saving and investing for retirement at age 22 and continue to do so until age 69 or 70, resulting in a $5 million egg, even if your income is in line with that of a typical American and not particularly high.
Don't write off the idea of a millionaire retirement
Let's be clear: When you earn $57,000 a year or a comparable wage, it's not easy to part with 10% of that sum for retirement savings purposes. You may have to make sacrifices, like living in a pretty small home or driving an older vehicle. You might have to cook most of your meals instead of enjoying them at restaurants.
But a millionaire retirement is attainable even if you're nowhere close to a six-figure earner. And that's something to keep in mind if you find the idea of building a large nest egg daunting.
