One of the biggest financial decisions anyone has to make is determining an approximate net worth number they want to be at before deciding to retire. This number will vary significantly based on different individuals’ needs and wants, which is completely okay. If you’re unsure what your number should or needs to be, there is no shortage of formulas to help you make the right determination, including for those who make around $400,000 annually. 

Where You Want to Be

If you are making $400,000 and want to retire by 65, the calculation isn’t all that difficult, especially regarding where your general financial advisor says you should be. At the minimum, you should have at least $2.98 million saved by age 65, around a 7.5 multiplier of the existing salary. 

Of course, it’s important to remember that this is much more than just traditional savings. You must assume a few things to achieve this calculation and stay sufficiently ahead while retired. First and foremost, assume you are making a 15% pre-tax retirement contribution while working. 

There is also the consideration that you are in the 28th percentile for income tax, which means a 28% effective tax bracket on the $400,000 annually. Beyond taxes, you’re also considering that you are making an average 6% annual portfolio return before you turn 65 and retire. Once retired, you’ll likely want to reduce your risk, so your return becomes 5% post-retirement. 

Last but not least, this $2.98 million calculation also includes the start of Social Security at 65. At 65, you’re two years shy of Full Retirement Age, so you’re likely just under the $3,822 maximum payment you would hit at 67. 

All of these numbers account for inflation and will aim to keep you financially secure while you are retired. Yes, there will be market volatility. Every good financial advisor should prepare you for the market to move up and down, market corrections, Bear and Bull markets, etc. However, the 6% pre- and 5% post-retirement return rates are standard numbers. 

What To Do If You Are Behind

The good news is that if you are behind on the $2.98 million figure and want to catch up, there are multiple methods to do so. 

Increase 401(k) Contributions

One of the most immediate changes you can make if you’re over 50 is increasing your 401(k) contribution. If you are over 50, you can contribute an extra $7,500 plus the standard $23,000 max contribution, equaling $30,500. If you’re not at this number and have the additional income to make this maximum contribution, you should immediately begin doing so with catch-up contributions. 

Cut Spending

This may be tough to swallow but to achieve your goal, some sacrifices have to be made. This could mean cutting your monthly budget and better managing your finances to free up additional income for investment. There is a good likelihood that your expenses will decrease by approximately 30% when you retire. Still, you must consider this cut level now if you are serious about catching up. 

Push Back Retirement

This is a challenging recommendation, but consider pushing retirement back a few years if you need additional time in the workforce to catch up on retirement savings. It’s a life-altering decision for you and your family, so this decision shouldn’t be made lightly. However, it might be the smartest move if you need to push retirement for a few more years.  

What To Do If You Are Ahead

If you are ahead on your retirement savings, the best decision might be to continue strategically investing to increase your return rate. Consider a larger diversification of your portfolio to increase the level of return you are seeing. Of course, this needs to be done without affecting your level of risk tolerance, but it can be done. 

For example, invest money in a Roth IRA, which offers a contribution method that occurs post-tax on your paycheck, and any earnings you make in this account are tax-deferred. If you’re over 60, withdrawals are tax-free as long as you have had the account for over five years, and there are no required RMDs. 

Another strong idea is to invest in a Health Savings Account to take advantage of post-retirement. This will help you offset some medical costs you will not receive reimbursement on through private medical care or Medicare. 

 

 

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