Here's How Much You'd Have to Save to Retire With $150,000 a Year

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KEY POINTS

  • The earlier you begin planning for retirement, the better the odds of hitting your goals.
  • Planning to live on guaranteed income can ease the stress of retirement planning.
  • Living on guaranteed income means getting rid of debt and keeping your basic expenses low.

Whether it feels like it or not, retirement is closer than you think.

We all have different ideas of what constitutes the "ideal" retirement. For some of us, it's traveling the world. For others, it's spending time with family and friends and living the simple life. If you've thought about retirement and have decided that $150,000 per year will be enough to finance your retirement goals, we've worked out how much you'll need to put away to make it a reality.

For the sake of this illustration, let's say you're 35 years old and work until age 70 to take advantage of the boost working a few extra years provides. And let's say you beat the current average life expectancy of 79 and live until you're 90. That gives you a 20-year period for which to plan.

Social Security or pension

Today, the average Social Security payment for recipients who retired at age 65 is $2,484 per month. However, since this scenario has you working until you're 70, we can safely raise that amount to $3,000.

We'll stick with the $3,000 amount, even if you're receiving a pension or a combination of Social Security and a pension.

Since $3,000 x 12 = $36,000, we can subtract that amount from your desired annual income of $150,000, leaving you with a shortfall of $114,000.

Note: One way of relieving the financial stress of retirement is to plan to live on your guaranteed income and use funds from savings and investments for "fun" things like travel and upgrades to your home. To achieve this goal, you may need to pay off existing debt and keep your basic expenses low.

Savings

According to this illustration, you have 35 years left to work, so that means that you have 35 years to sock money away in an emergency savings fund. For example, if you were to open a money market account (MMA) or a high-interest savings account, the interest paid is unlikely to keep pace with inflation. Still, if you put $200 per month into an emergency fund with an APY of 2%, you'd have $120,000 tucked away by retirement.

If you divide that $120,000 by the 20 years you plan to be in retirement, that gives you an extra $6,000 per year to work with and brings your annual shortfall down to $108,000.

Investments

Historically, a well-balanced portfolio, including stocks from the S&P 500, has provided an average annual return of 10%. Considering that the average annual inflation rate between 1960 and 2021 was 3.8%, investing has provided an excellent way to beat inflation.

A common rule of thumb is to withdraw no more than 4% from investments in the first year of retirement. In order to withdraw $108,000, you'd need a portfolio of $2.7 million. To achieve that, you would need to invest approximately $1,600 per month in a retirement plan with an average annual return of 7%. It may be any retirement plan, from an IRA to a 401(k).

Of course, if you have access to a company-sponsored retirement plan like a 401(k) and your company matches a portion of your contribution, you could invest less and still hit your goal.

However…

Withdrawing 4% each year for 20 years may be unrealistic. In years when inflation is higher than 4%, your money is not going to go as far. Those are the times when you may have to scale back spending and leave a little more in your investment accounts to grow.

Other considerations

This scenario is based on the premise that you're never going to require the care of an in-home nurse or need to move into a nursing home for a short time. While it may never happen, it does not hurt to plan for the worst. Here are two options:

  • Purchase long-term care insurance while you're still working.
  • Set up a family trust and at some point in your senior years, make it irrevocable. As long as your trust is irrevocable and is managed by a trustee for five years or more, Medicaid will pay for nursing care. This is definitely a subject you should visit with a highly experienced estate attorney.

Age matters

Compound interest is a thing of beauty, and the longer you give it to work its magic, the more money you can count on in retirement.

AGE YOU BEGIN INVESTING $1,000 PER MONTH VALUE AT AGE 70, ASSUMING A 7% ANNUAL RATE OF RETURN
25 $3.4 million
30 $2.3 million
35 $1.6 million
40 $1.1 million
45 $759,000
50 $492,000
55 $302,000
60 $166,000
65 $69,000
Data source: Author's calculations.

If this doesn't work for you

If you're not happy with the numbers you see here, you have at least two options:

  • Refigure the amount of income you'll require in retirement.
  • Adjust your annual investment contributions. Some people add as little as 1% each year.

As far off as retirement may feel, it will be here before you know it. Today is the day to begin thinking about how best to provide for yourself during that time.

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