Want $40,000 in Annual Retirement Income? Here's the IRA Balance You Might Need to Get It

Many people find they're able to live on less once they stop working and enter retirement. This could be due to a combination of factors, such as not having to spend money commuting and having more time for cooking and home maintenance, rather than paying to outsource those tasks.

That said, you'll still want a decent amount of income so you're able to live comfortably as a retiree. And for you, that might mean needing an annual income of $40,000. 

You may be curious as to what IRA balance it'll take for you to have that annual income. The answer depends on different factors, but here's a basic overview.

Your IRA probably won't be your only source of income

Let's get one thing out of the way. Your IRA most likely will not be the only income source available to you in retirement. 

Chances are, you'll at least have some benefits from Social Security. And you may have other income at your disposal, such as earnings from a part-time job you opt to hold down so you can keep busy.

But let's assume you want $40,000 a year out of your IRA alone. In that case, the balance you need will depend on the withdrawal rate you're comfortable with.

For years, financial experts supported a 4% annual withdrawal rate. If you go with a similar rate, it means you'd need $1 million in your IRA to withdraw $40,000 a year from your savings. 

But you may want to go with a lower rate than 4%. When that guidance was established, bonds were paying a lot more money. Bonds are a common investment for retirees since they're less volatile than stocks. But since they're paying less these days, a 4% withdrawal rate might be too aggressive -- meaning, it could put you at risk of depleting your savings in your lifetime.

In that case, you may decide to go with a 3% annual withdrawal rate instead. That means you would need about $1.33 million in your IRA to receive $40,000 a year.

What to do if your IRA needs work

Let's say you're midway through your career and only have about $50,000 in your IRA. There's a good chance that with the right investments, your balance could grow nicely over time -- but not necessarily to $1 million or $1.3 million.

Let's say you contribute $200 to your IRA over the next 20 years on top of that $50,000, and your investments deliver an average annual 10% return, which is in line with the stock market's average over the past 50 years. That means you'd be looking at a pre-retirement balance of about $474,000.

A balance like that is impressive, but it's not going to allow for $40,000 a year of income by itself. So in that case, you'll need to boost your monthly contributions to get to where you want to be.

One option is to prioritize your spending. This doesn't mean cutting back on every single expense you spend money on today. Rather, decide which things are most important to you and spend more of your money there. Then, spend less on things that mean less to you.

For example, let's say you want to find another $300 a month for your IRA. If it's important to you to have a comfortable home, don't move to a cheaper rental. Instead, dump your car with a $700 monthly payment and replace it with one with a $400 monthly payment.

Another option is to take advantage of the gig economy. Traditional IRAs are funded with pre-tax dollars. So if you earn $300 a month from a side hustle, you can use that entire $300 to help fund your IRA every month. If you're able to contribute $500 a month to your IRA on top of your $50,000 balance for the next 20 years, you'll end up with around $680,000, once again assuming a 10% average yearly return in your portfolio.

The numbers might work out more easily than expected

A $40,000 income might make for a comfortable retirement, especially if you have lower expenses at that point and a paid-off home. But if you want $40,000 a year out of your IRA, that may be a tall order. And you might have to do some serious ramping up to get your balance  high enough to allow for such large withdrawals. 

That said, the average Social Security benefit at the start of 2024 is estimated at $1,907 a month, or about $23,000 a year. So if you're factoring in that income, it could take some of the pressure off of your IRA. 

If you only need $17,000 a year to come from your IRA, at a 3% annual withdrawal rate, that means you'd need a balance of about $567,000. That's still a large sum, but it may be more doable.