According to a recent survey of investors by UBS Investor Watch, it now takes $5 million in investable assets (with about 20 percent of that in cash -- or highly liquid investments like CDs or money market funds -- for emergencies) for a person to feel wealthy and enjoy "no financial constraints." But what does it take to actually get there?
To achieve a portfolio totaling $5 million may sound like a lofty goal. And it is for the average worker.
For example, let's see what would be required for a 22-year-old who starts his career with a $50,000 salary to get to $5 million. That's not so much higher than the average starting salary for a college grad in 2012 -- $44,259 -- but we're about to make few the grandiose assumptions: First, that he saves (and invests) half of his salary and earns 10 percent annual returns on that money. Next to make his chances even better, we'll assume he gets 5 percent annual raises.
Here's the projected growth of his portfolio:
He wouldn't cross the $5 million threshold until his 69th birthday.
Yet how realistic is it to expect above-average annual raises and the ability to save 50 percent of your pre-tax pay? Not very.
Let's also look at a woman who starts building her portfolio in her 30s.
Maybe she has an advanced degree (from law school, for example) and starts her career making $150,000 a year with 10 percent raises each year. She manages to save 30 percent of her salary. Let's also assume she is an ace investor and achieves 20 percent annual returns. (Returns like that are quite high, but remember, this is hypothetical.)
Here's what her portfolio might look like:
Crazy, huh? Roughly the same trajectory. And again, quite an improbable scenario.
So What's the Secret to Hitting $5 Million While You're Young Enough to Enjoy It?
Obviously, there are people who do reach this $5 million net worth before their 70th birthday.
You might assume these pentamillionaires got a nice head start by inheriting their wealth. And you're right -- some do. But that only accounts for about 20 percent of folks, according to The Millionaire Next Door.
While that's interesting, it's not necessarily helpful for those of us who aren't hot-shot executives or heirs of multiple millions of dollars.
So $5 million might be out of reach for the typical American worker. But... you don't need to aim for that goal to ensure a stable retirement on a seven-figure portfolio.
You see, despite what the investors queried for the UBS study feel, retiring with $1 million is very much a reasonable goal for most of us to achieve financial comfort. And -- even better -- it's entirely within reach.
Here's How ...
Let's take similar scenarios to those outlined above and put it in much more realistic terms.
First up is the 22-year-old fresh out of college making $45,000 a year (the average starting salary for 2013 graduates). He'll receive 3 percent annual raises, religiously save 10 percent of his salary, and get annual returns of 7 percent (a bit below the market's average of 10 percent).
His portfolio would be worth over $1 million before his 57th birthday. If he works until he's 65, he'll have more than $1.9 million saved.
Next let's look at the 30-year-old woman who just graduated law school. She starts off making $71,500 a year (the average salary for a first-year associate according to Robert Half Legal). She too receives 3 percent annual raises, saves 10 percent of her salary, and gets annual returns of 7 percent.
Her portfolio would be worth over $1 million before she turns 60. And working until age 65 would bring her a portfolio of more than $1.6 million.
Not Too Bad! But You Can Do Even Better
It's also important to note that there are some positive factors that we didn't even include in the estimates above.
First, we assumed these individuals invested a fixed 10 percent each year. But there may be some years you'll be able to invest even more using bonuses, tax refunds, etc. This would get you to the $1 million mark even quicker.
Second, our scenarios assume flat 7 percent annual returns. Maybe over the course of your career, the market enjoys a bullish run and your returns are better than that, thus enabling you to achieve the $1 million goal sooner.
Lastly, we only assumed they saved 10 percent of their pay. For many of us, our employers also contribute to our retirement plans with matching contributions up to a certain point. That alone could enable you to save an additional 3 percent each year without any additional belt tightening. Using our examples above, this employer retirement perk lowers the first saver's $1 million crossing party to before his 53rd birthday, and the woman's $1 million mark to before her 57th birthday.
So although $5 million may not be within reach for "the rest of us," saving more than $1 million definitely is. And it's no more difficult than taking a disciplined approach to saving -- and investing -- a fixed percentage of your salary.
Adam J. Wiederman is a Motley Fool contributing writer.