How Much Do You Need to Save for a $5 Million Nest Egg?

We can talk about the right way to invest your money all day long. But what is investing good for if not to finally reach your goal nest egg so you can reach financial freedom and retire if you’d like. Or at least start working on your own terms. So, let’s talk a bit more about something very tangible and actionable: how much you need to save to reach an appropriate nest egg for financial freedom!

As a quick aside, you may wonder why I’m not asking how much you need to invest to reach an appropriate nest egg. And the reason is that, especially when you start investing, what you save is way more important than how you invest and the returns you get on those investments.

So, in my mind, saving is really the foundation upon which your nest egg and financial freedom is built.

And now that we have those semantics aside, let’s get into it. And the first thing we need to establish is…

What is an appropriate nest egg for financial freedom?

This is a really personal and individualized question. Because the nest egg that you need for financial freedom will depend on what your expenses are and what you want them to be in retirement. So it will differ.

But let’s try to make some generalizations. Because I have noticed some patterns when talking to a lot of doctors about their goal nest eggs.

First, remember the equation to figure out what your goal nest egg is:

Nest egg = Annual Expenses/4% = Annual Expenses * 25

The way we come up with this equation is that the Trinity study demonstrated that if you withdraw 4% of your nest egg annually in retirement, you have a near absolute chance of not running out of money before you die. Now, I know the Trinity study is flawed and some of us may prefer the “Die with Zero” approach, but this is a good place to start. And then we can fine tune from there.

Anyway, the goal nest egg that Selenid and I chose in our original written financial plan is $5 million. And without a doubt, the most common goal nest egg that I get quoted by other doctors is $5 million.

Why?

Well, use the equation above with some re-arranging and you will see that a $5 million nest egg will allow you to cover $200,000 in annual expanses in retirement. And that should be more than enough for any doctor! Especially considering that in retirement you shouldn’t be paying for a mortgage (should be paid off), disability or life insurance (you are financially free!), as well as some other expenses like children’s education.

Keep in mind that passive income will impact this goal nest egg number as this post explains. However, for our purposes here, I’m going to ignore passive income.

That’s why I think $5 million is a great starting point for a generalizable goal nest egg. And that will be the number we use for the purposes of this post.

So, how much do we need to save to reach our goal nest egg? Patience, patience. First, we need to define a few more variables…

The other variables in the equation

You may recall from this post that, on Microsoft Excel, there is a Future Value function that can help predict the growth of your money through savings and investments.

The equation goes like this:

Future Value = FV (X%, Y, -Z, A, 0)

The first value X is the interest or return rate.

The second value Y is the number of years you are contributing. Basically it’s the number of years until your retirement or until you reach financial freedom.

The next value Z is the annual contribution amount which must be put in as negative.

The next value A then is your current savings. If you have $10,000 already saved, you would put “-10000″ in this position.

The last value is a “0” if you are contributing at the end of the year, which is default, or a “1” if contributing at the beginning of the year. So I left a zero there.

What do we do with all these variables?

Things could seem a bit overwhelming now with all of these variables. And the question of how much we need to save seems to depend on all of this, making hot impossible to focus down on a single number.

But fear not. With some simple assumptions, we get some clarify and simplify our problem.

For our value “X” which represents a return rate, this is always an estimate. And we want to underestimate here. So, let’s assume a 5% after-tax, after-fee return rate from investing in low cost broadly diversified index funds based on our asset allocation. I know average long terms returns from the overall stock market have been 7%, but we are playing it safe.

For value “Y” or the years that we will be saving and investing, let’s say 20.

Value “Z” or our annual contributions is what we are going to play around with. So that stays as a variable for now.

Meanwhile, “A” or our starting savings will be kept at $0.

So, finally, how much do we need to save to reach our goal nest egg?!

Ok, we are ready!

And you can play along. Either bust out an Excel sheet and run the FV equations with me or download my FIRE calculator here to do the same thing but in an easier way.

What we are going to do is keep entering values for the “Z” variable until we reach or exceed our goal nest egg amount of $5 million.

Do this and you will find that you need to save roughly $76,000 annually (and invest it!) to reach your goal nest egg of $5 million.

That comes out to saving $6,333 per month. Certainly within what is possible for doctors. You can do this by maxing out your 401k and backdoor Roth with a bit in taxable account.

But let’s play around with the next most important variable – time!

Because we are all starting at different time points and career points. And I will always stand by the fact that it is never too late to start.

But the fact of the matter is that we do need to adjust our plans depending on when we start. That doesn’t impact if we can still achieve financial freedom or not, but it does impact the strategy we need to use.

So, let’s cut down to time to financial freedom or time to retire to 20 years…

Now, $153,000 of annual savings are needed to reach this goal nest egg. Assuming no other savings or prior investments are present, which is unlikely.

Now, you need to max out catch up contributions to your 401k, backdoor Roth IRA, with a sizable amount contributed to a taxable account.

Now, let’s say we having a longer time period…

Imagine that you have 35 years until retirement. Maybe you are just starting off your career. Or maybe you plan to CoastFI and still work in partial retirement.

A very manageable annual savings of $56,000 is now all that is needed. This can even be achieved just by maxing out your combined employee-employer contributions to a 401k ($66,000 limit in 2023).

What should we take away from this?

I hope that you take away from this a few main things:

• Understanding of the role that savings plays in determining your financial freedom nest egg
• Appreciation of the power of compound interest and why starting now (whenever that falls in your career trajectory) is better than waiting
• Recognition that planning for your nest egg is important

Here are some immediate action steps that you can take to get started building your nest egg!

• Download my FIRE calculator and start playing around with your specific variables
• Map our your money flow so you can see where your spending goes
• Use that money flow to create a budget and set a savings rate
• Use those savings to invest in one (or many) of these 11 ways

And tie a bow on it by crafting your own written personal financial plan using mine as a guide!

What do you think? What is your goal nest egg? How do you plan to reach it? Do you need to save more or less than you thought to reach your nest egg? Let me know in the comments below!