Here’s how much you should save to retire with $150,000 a year

An elderly couple standing on the beach and watching the sunset with their arms around each other.

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


Key points

  • The earlier you start planning for your retirement, the better your chances of achieving your goals.
  • Planning to live with a guaranteed income can ease the stress of planning for retirement.
  • Living with a guaranteed income means getting rid of debt and reducing basic expenses.

We all have different ideas about 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 a simple life. If you’ve thought about retirement and decided that $150,000 a year will be enough to fund your retirement goals, we’ve calculated how much you’ll need to set aside to make it a reality.

For the purposes of this illustration, let’s say you’re 35 and working until you’re 70 to take advantage of the boost a few extra years give you. And let’s say you beat the current average life expectancy of 79 and live to be 90. That gives you 20 years to plan.

Social security or retirement

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

We will stick with the $3,000 amount, even if you receive a pension or a combination of Social Security and a pension.

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

To note: One way to ease the financial stress of retirement is to plan to live on your guaranteed income and use your savings and investment funds for “fun” things like travel and home improvements. To achieve this goal, you may need to pay down your existing debts and limit your basic expenses.

Savings

According to this illustration, you have 35 years left to work, which means that you have 35 years to save money in an emergency savings fund. For example, if you were to open a money market (MMA) account or a high-interest savings account, the interest paid is unlikely to keep pace with inflation. Yet if you put $200 a month into an emergency fund with an APY of 2%, you’ll have $120,000 hidden away in 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 and brings your annual shortfall to $108,000.

Investments

Historically, a well-balanced portfolio, including S&P 500 stocks, 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 a great way to fight inflation.

A general rule is not to withdraw more than 4% of investments in the first year of retirement. To withdraw $108,000, you would need a wallet of $2.7 million. To achieve this, you would need to invest around $1,600 per month in a retirement plan with an average annual return of 7%. This can 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 achieve your goal.

However…

Withdrawing 4% every year for 20 years may be unrealistic. In years when inflation is above 4%, your money won’t go that far. These are the times when you may need to reduce your expenses and leave a little more in your investment accounts to grow.

Other Considerations

This scenario is based on the premise that you will never need the care of a home nurse or that you will need to move into a nursing home for a short time. Even if it will never happen, it doesn’t hurt to plan for the worst. Here are two options:

  • Get long-term care insurance while you’re still working.
  • Establish a family trust and, at some point in your old age, 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 something you should explore with a very experienced real estate attorney.

age matters

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

AGE YOU START INVESTING $1,000 PER MONTH

70-YEAR VALUE, 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 that doesn’t work for you

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

  • Redefine the amount of income you will need in retirement.
  • Adjust your annual investment contributions. Some people add as little as 1% each year.

As far off as retirement may seem, it will be here before you know it. Today is the day to start thinking about how best to support yourself during this time.

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