IS IT POSSIBLE TO BUILD A $1 MILLION NEST EGG?

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“Do not save what is left after spending, but spend what is left after saving.” – Warren Buffett

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What would it be like to have a net worth of $1 million? Everyone dreams of being a millionaire. But, if it was easy, everyone would be rich! Every person questions if it is within the realm of possibility to create a $1 million retirement nest egg. Statistics reveal that having a net worth greater than $1 million is a reality for 8.8% of the US population.

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Several years ago I was invited to attend a private function. All the guests in attendance were either professionals or business owners. There was one person in attendance, however, who didn’t seem to fit! (My description of this person, his job, and financial details have been altered to protect his identity.) His clothes were not of a professional style, and his stance and demeanor were atypical. Because he was so obviously different from all other guests, I decided to walk over and speak with him and listen to his story. He and I had a very enlightening conversation that lasted for an extended time. He related that he was a tradesman (carpenter, electrician, plumber, painter, etc.), and had been for about 35 years. His appearance, job, and clothing were all unremarkable. Nothing about him was really impressive until he told me his net worth was over $25 million. In addition to his trade, he had a seven-figure annual passive income from residential and business rental property. He had also bought several distressed businesses in the last few years and was in the process of making them profitable. It was at this point in the conversation that I learned a valuable lesson. Everyone else in the room was intelligent. This guy was wicked smart!

I related this story because with my potential to earn an above average income, readers may say it’s easy for me to get to the $1 million level. Earning an above-average income places me at a different starting point than most workers. This man taught me that income doesn’t matter! Again, income doesn’t matter! He took a portion of his income and invested and leveraged his investments into a net worth well into eight figures ($25,000,000+). Even with an average income, he has amassed a Net Worth well over the figure of our imaginary $1 million nest egg and well over the Net Worth of virtually every worker in the USA!

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If a $1 Million Nest Egg is a Reality for Approximately 9% of the US Population, Can a Net Worth of $1 Million be a Possibility for You? Is it Possible With Only an Average Income?

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This question of building a net worth of $1 million can best be analyzed by approaching the problem from two differing positions. The first position relates to the Technical Aspects of creating a $1 million nest egg. The second position relates to the Behavioral Aspects of creating the same $1 million nest egg. These two positions are as unrelated as sunrise is to sunset, but successfully navigating both is required for ultimate success.

Let’s swing for the fence by finding out what it takes to create a $1 million nest egg!

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Technical Aspects of Saving $1 million.

The technical aspect of saving $1 million is a mathematical equation that requires two things. The two things needed to create a $1 million nest egg are time and money. The easiest explanation of how this works is that these two things are inversely related. What does that mean? Greater cash investments require less time to reach $1 million. Smaller investments will require longer periods to allow for compounding to grow a nest egg to $1 million (See: COMPOUNDING MAGIC: HARNESSING THE EIGHTH WONDER IN YOUR FINANCES.)

Let’s look at a graph taken from MoneyUnder30.com:

The graph assumes an annual rate of return of 10%. (That rate is less than the average rate of return for the S&P 500 for the last 50 years.) It should also be noted that more money invested equals less time to reach $1 million. Approximately $5000 invested per month at a 10% return will generate a nest egg of $1 million In 10 years. An investment of $180 per month will also generate a $1 million nest egg. However, it will take approximately 40 years at this rate of saving. So, beginning to save earlier, means that less money can be invested monthly to reach a $1 million goal. Someone who starts saving $180 a month at age 20 could comfortably expect a $1 million nest egg in their early 60s.

When you want to reach $1 million will determine how much you need to save each month. The math is simple: take the age you want to retire and subtract your current age. This will give you the number of years available to save for your goal. If you are 20 and want to retire at 50 then your required period is 30 years and you must save accordingly. The same 20-year-old who wants to retire at 60 will have 40 years and requires fewer dollars saved each month.

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The above-stated dollar amounts and time frames assume an annual return of 10%. Anyone with any investing experience knows that the market very rarely returns exactly 10% in any given year. Rates of return vary annually and by different asset classes. Different asset classes have different rates of return.

Let’s look at a graph of some of the more common investment vehicles:

The above assets are listed in order of decreasing risk. Decreasing the risk in a portfolio also decreases long-term returns. Younger investors can tolerate increased risk and should adjust their portfolios accordingly. Most portfolios include a combination of many different asset types which will define risk and return (See: MASTERING THE PORTFOLIO: UNDERSTANDING THE NUTS AND BOLTS.) Both beginning investors and accomplished investors can attain a $1 million nest egg. However, a person does not have to be able to fully comprehend all the subtleties of portfolio construction, asset location, and asset management to create a $1 million net worth. A $1 million net worth can be accomplished using large enough cash investments. It’s harder to reach the $1 million goal without taking some risk, but it’s possible. Remember, a net worth of $1 million requires two things: appropriate dollars invested, and adequate time.

Technical tips to fast-track your $1 million nest egg:

• Educate yourself– the more you know and understand about investing, the fewer mistakes you will make, and the quicker you’ll reach your goal. Both the public library and the Internet are filled with educational content.
• Portfolio construction– build a portfolio that is best suited to your investment style, risk tolerance, and time horizon. Remember that “Time” is your friend and younger investors can tolerate much more risk.
• Investing– invest as much as possible as often as possible. The amount and frequency of investing, along with the rate of return, normally determines the amount of time needed to reach a goal. Every dollar invested can grow and compound to help reach your ultimate goal.
• Stocks– stocks have historically provided the best long-term rate of return. Stocks with growth potential such as large-cap stocks, growth stocks, value stocks, and small-cap value stocks have provided excellent long-term returns.
• Expenses– keep expenses low. Each basis point of expenses equals 1/100 of one percent (100 basis points equal 1%.) Every basis point of expenses equals less money to invest. Even investment expenses as low as 1/2 to 1% can have a significant detrimental effect on terminal portfolio balances over long periods.
• Start early– even though this is the hardest time to begin saving, starting early will provide the greatest ultimate rewards. The earliest investments have the longest period to grow and compound!
• Improve tax awareness– taxes act in much the same way as expenses levied on investment accounts. The more tax-efficient a person becomes the less that is paid in taxes and more cash becomes available to invest. When used properly and efficiently Traditional IRAs, Roth IRAs, and workplace retirement plans are excellent forms of tax-efficient investing.
• Avoid senseless and luxury items– everyone has things that they want, but don’t specifically need! These are usually more expensive items that require larger cash outlays. This also means that there will be less money available for investment purposes.

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Behavioral Aspects of Saving $1 Million

As much as the technical aspects of saving $1 million are about math, the behavioral aspects of saving $1 million are about psychology. Success lies in the belief that each person has the ability and temperament to achieve the goal of saving $1 million. One must believe that a $1 million goal Is attainable. Beliefs must also be long-lasting and consistent, as it will take years from the beginning of an investment program to ultimately achieve the goal! Taking shortcuts and making excuses will not get you to your goal. You must first believe that you can achieve your goal! Napoleon Hill said “Whatever the mind can conceive and believe, the mind can achieve! You must believe that you can reach the goal of a $1 million nest egg, and must commit to achieving that goal. A plan must be formulated, and that plan must be implemented using appropriate action to affect a successful conclusion.

Behavioral tips to fast-track your $1 million nest egg:

• Automate savings-one of the first, quickest, and easiest ways to jumpstart an investment program is to automate savings! Money automatically deducted from a paycheck is not available to spend and is not missed. No one misses spending money that was never available! 
• Don’t access retirement accounts early– one of the biggest temptations is the temptation to withdraw funds from a savings account once it increases. Investors may view investment accounts as additional savings accounts. Investment accounts are not savings accounts! Assets withdrawn from qualified retirement accounts are not available for future growth or compounding. Additionally, the withdrawal may be subject to both income taxes and penalties.
• Make a budget– clients frequently state they don’t know how and where they spend money. Using a Budget is a precise and efficient way to track Spending. I was not a big budget fan when I was actively working. But, I was always certain that monthly spending did not exceed monthly income. Available income at the end of every month created additional funds to invest. The majority of my investments were through a qualified retirement plan in my dental practice. Money not spent at the end of each month was available for additional investment, and Net Worth growth.
• Eliminate high-interest credit cards– consumer debt, especially credit card debt, involves high-interest charges on unpaid balances. All credit card balances should be paid in full with every billing cycle. If this is not possible, or there is debt from multiple credit cards, then the smallest balances should be paid off first. This extra savings from paying off a card can then be used to accelerate payments and debt reduction on other credit card balances. (Paying off a credit card violates the principle of saving first! Reducing consumer debt is necessary in many cases to free up money to allocate to a retirement plan.)
• Be consistent– this is a long-term commitment. For success, one must save consistently. Infrequent contributions are better than not saving, but automatic and consistent saving is the best and surest way to reach a retirement goal.
• Stop senseless spending– can people treat themselves occasionally to a small luxury? Purchasing an unnecessary luxury vehicle will have an infinitely higher ultimate cost than small infrequent expenditures for an occasional “treat.”
• Don’t sell yourself short– don’t think that you are unable to attain your goals. Believing in yourself and your ability is the first step towards attaining your goal.
• Track expenses and investments– it’s important to know how and where money is spent. Knowing expenditures makes it easier to target expenditures that can be eliminated or reduced. Tracking investments will give the investor a sense of how investments are performing. Investment tracking creates a basis for future investments.
• Make more money– more income can equal more money for investment. Not everyone can readily make more money, and not everyone wants to spend the time and effort needed to generate additional income.
• Keep the big picture in mind– this represents the “Big Rocks First” concept. Almost everyone has seen or heard of the example of a jar that needs to be filled with rocks of varying sizes. If the smaller stones or placed first, this may not leave space for the bigger rocks. If the bigger rocks are placed first, then normally the smaller rocks will fit easily in the space around the big rocks. In much the same way, people who focus on the minutia of investing tend to overlook the big rocks. Instead of looking at the big picture, they focus on small, tactical projects and lose focus on the success of the overall project.
• Decide how long you want to work– different levels of investment percentages require different lengths of work and investment. Knowing how much money you invest and how this equates to how long you must work is basic necessary information.
• How much do you expect investments to earn– different portfolios are constructed to provide certain expected returns with certain risk tolerances. Everyone wants the highest return possible, but not everyone is willing to accept the level of risk the highest return may necessitate.
• Stay the course– creating an investment plan and starting an investment program requires significant outlays of time and effort. A common problem can be termed “Investment fatigue.” Excited investors can become fatigued, or weary over time, and as a result, investment contributions decline, and investment performance suffers.

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So there it is! Financial success means that two mental balls (technical aspects and behavioral aspects) must be continually juggled for many years. Losing focus by dropping one or both of the juggled balls can cause failure, having to start over, or losing momentum and position. Education and practice will be key to both mental juggling and practical success! Like my new acquaintance with the $25+ million Net Worth, anyone with the ability to save, invest, and delay gratification until a later date can reach the $1 million goal!

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Final Thoughts 

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• Whatever the mind can conceive and believe, the mind can achieve!
• Successfully reaching the goal of a $1 million Net Worth requires satisfying both technical and behavioral requirements.
• Key principles necessary for success have been discussed. Starting early, automating savings, and being aggressive when young will all help to jumpstart a successful investment program.
• Consistency and continuity are necessary to complete the goal of a $1 million nest egg.
• Everyone, with proper education and motivation, can reach the level of 9% of the US population with a net worth of over $1 million.
• A $1 million nest egg is an attainable goal for anyone willing to step up and pay the price! “Whatever you want, oh discontented man, step up, pay the price – and take it.” -Napoleon Hill

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