Question: I'm 40-years-old and my current networth is $1,470,000.

I'm trying to make a back-of-the-napkin plan to see what I need to do to get to $3M—ideally in around 5ish years but hopefully within 10 years.

It might be too ambitious of a plan but curious what it would take to get there.

My current stats:

401k and taxable brokerage: $1,230,000

Cash: $234,000 (I know I have too much cash—I have a side business that requies I keep some cash on hand but working on getting the rest invested).

All my invstmetns are in VTSAX.

With this info in mind, how much do I need to save/invest each year (over a 5-10 year horizion) to realistically hit a $3M networth—assuming standard returns?

Answer: Calculating How to Reach a $3 Million Net Worth in 5 to 10 Years

Hello! Congratulations on building a substantial net worth at 40 years old. Reaching a $3 million net worth is an ambitious goal, but with careful planning and disciplined investing, it can be achievable. Let's explore what it would take to reach your target within both a 5-year and a 10-year timeframe, assuming standard market returns.

Your Current Financial Snapshot

Age: 40
Current Net Worth: $1,470,000
- Investments (401(k) and Taxable Brokerage): $1,230,000 (invested entirely in VTSAX)
- Cash: $234,000 (some required for your side business; planning to invest the rest)
Investment Vehicle: Vanguard Total Stock Market Index Fund (VTSAX)
Goal: Increase net worth to $3,000,000 in 5 to 10 years
Assumptions:
- Average Annual Return: 7% (historical average for the U.S. stock market)
- Inflation: Not accounted for in these calculations (figures are nominal)

Understanding the Growth of Your Current Investments

Scenario 1: 5-Year Time Horizon

Growth of Current Investments Without Additional Contributions:

Year 1: $1,230,000 × 1.07 = $1,316,100
Year 2: $1,316,100 × 1.07 = $1,407,227
Year 3: $1,407,227 × 1.07 = $1,503,733
Year 4: $1,503,733 × 1.07 = $1,605,995
Year 5: $1,605,995 × 1.07 = $1,718,414

Outcome: In 5 years, your current investments would grow to approximately $1,718,414 without additional contributions.

Scenario 2: 10-Year Time Horizon

Growth of Current Investments Without Additional Contributions:

Year 1 to Year 5: As above, reaching $1,718,414
Year 6: $1,718,414 × 1.07 = $1,838,703
Year 7: $1,838,703 × 1.07 = $1,967,412
Year 8: $1,967,412 × 1.07 = $2,105,131
Year 9: $2,105,131 × 1.07 = $2,252,491
Year 10: $2,252,491 × 1.07 = $2,410,166

Outcome: In 10 years, your current investments would grow to approximately $2,410,166 without additional contributions.

Calculating the Additional Savings Needed

To reach your $3 million goal, you'll need to contribute additional funds to make up the difference between your projected investment growth and your target net worth.

1. 5-Year Plan

Shortfall After 5 Years:

Target Net Worth: $3,000,000
Projected Investments Value: $1,718,414
Shortfall: $3,000,000 – $1,718,414 = $1,281,586

Annual Savings Required Over 5 Years:

Approximate Annual Savings Needed: $1,281,586 ÷ 5 years = $256,317 per year
Considering Investment Growth on Contributions:
- Since your annual contributions will also earn returns, the actual amount you need to save annually is less than $256,317.
- However, even with investment growth, you would still need to save over $220,000 per year to reach your goal in 5 years.

Outcome: Saving over $220,000 annually for 5 years is quite challenging unless you have a very high income or can significantly reduce expenses.

2. 10-Year Plan

Shortfall After 10 Years:

Target Net Worth: $3,000,000
Projected Investments Value: $2,410,166
Shortfall: $3,000,000 – $2,410,166 = $589,834

Annual Savings Required Over 10 Years:

Approximate Annual Savings Needed: $589,834 ÷ 10 years = $58,983 per year
Considering Investment Growth on Contributions:
- Your annual savings will also earn returns over the 10 years.
- Accounting for investment growth, you would need to save approximately $42,000 to $45,000 per year to reach your goal.

Outcome: Saving around $42,000 to $45,000 annually over 10 years is more attainable and becomes even easier if you invest additional cash now.

Impact of Investing Additional Cash Now

By investing more of your cash reserves now, you can reduce the annual savings needed.

Assuming You Invest an Additional $150,000 Now:

New Total Investments: $1,230,000 + $150,000 = $1,380,000

Projected Value After 10 Years:

Year 1 to Year 10 Growth: Following the same 7% annual return, your investments would grow to approximately $2,704,717 after 10 years.

New Shortfall After 10 Years:

Target Net Worth: $3,000,000
Projected Investments Value: $2,704,717
Shortfall: $3,000,000 – $2,704,717 = $295,283

Annual Savings Required Over 10 Years:

Approximate Annual Savings Needed: $295,283 ÷ 10 years = $29,528 per year
Considering Investment Growth on Contributions:
- With investment returns, you'd need to save approximately $21,000 to $22,000 per year.

Outcome: Investing an additional $150,000 now reduces your required annual savings over 10 years to around $21,000 to $22,000.

Considerations and Recommendations

1. Realistic Savings Goals

5-Year Plan: Saving over $220,000 annually may not be feasible unless you have a very high income.
10-Year Plan: Saving around $42,000 annually is more manageable, especially if you invest additional cash now.

2. Invest Excess Cash

Action: Invest as much of your excess cash as possible, keeping only what you need for your side business and an emergency fund.
Benefit: Increases your starting investment balance, reducing the amount you need to save annually.

3. Maximize Tax-Advantaged Accounts

Retirement Accounts: Ensure you're maximizing contributions to accounts like your 401(k) and IRAs to benefit from tax advantages.
Tax Efficiency: Tax-deferred or tax-free growth can significantly enhance your investment returns over time.

4. Review Your Investment Strategy

Risk Tolerance: Ensure your 100% equity allocation aligns with your comfort level, especially as you get closer to your target date.
Diversification: While VTSAX provides broad U.S. market exposure, consider adding international stocks or bonds to diversify and potentially reduce risk.

5. Prepare for Market Variability

Market Fluctuations: Be aware that the stock market can be volatile, and returns are not guaranteed.
Contingency Plan: Have a backup plan in case returns are lower than expected, such as being willing to adjust your timeline or savings rate.

6. Increase Income or Reduce Expenses

Boost Savings Rate: Look for opportunities to increase your income, such as expanding your side business or seeking higher-paying roles.
Reduce Expenses: Evaluate your spending to see if there are areas where you can cut back and redirect those funds to savings.

Final Thoughts

Reaching a $3 million net worth in 5 years is ambitious and would require substantial annual savings. However, over a 10-year horizon, the goal becomes more attainable, especially if you invest additional cash now and continue to save diligently each year.

By adjusting your time horizon, maximizing your investments, and potentially increasing your annual savings, you can create a realistic path toward achieving your financial goal.

Wishing you the best on your journey to financial success!