How much money do you need for a comfortable retirement? Is $250K, $500K, or $1 million enough? How much would you need to invest over time to save these amounts of money?
These are questions that everyone needs to answer as early in their career as possible. That way, you can make informed plans to set yourself up for the future you deserve once you reach retirement age and have to rely on savings to support yourself.
Here’s what you need to know about what each of these paths looks like so you can set yourself up for success in your later years.
Retiring with $250K
Retiring with $250K may not seem like much money, but it’s the scenario a lot of people find themselves facing. In fact, Fidelity reports that the average Baby Boomer has $249,300 in their 401(k) and $257,002 in their IRA.
So, what would that look like in terms of the income you get from investments?
Assuming that you follow the 4% rule, which is a common method of deciding on a safe withdrawal rate, you would be able to access 4% of your $250K in year one of retirement and then adjust up for inflation — and you could do this without running a huge risk of draining your accounts. This would mean you’d have around $10,000 in income from your retirement investment accounts.
Since the common recommendation is to aim to replace 80% of pre-retirement earnings, and Social Security replaces 40%, this wouldn’t be enough if your salary was above around $25,000. You’d likely have to struggle a lot as a retiree if you take this path.
Of course, this is an “easier” path to take during your working years, as you don’t have to save a lot to end up with $250,000. If you start investing at age 30, retire at 65, and earn a 10% average annual return, you could end up with a $250K nest egg if you invested just $76.87 per month. That’s an amount almost everyone can come up with.
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Retiring with $500K
So, what about retiring with $500K? What does that look like in terms of income and the path you’ll have to take to get there?
Applying the 4% rule again, we see that a $500K nest egg would give you around $20,000 per year in investment income to spend. That’s slightly better, but again, if your income is above $50,000, then you’re going to fall short of being able to replace the recommended minimum amount as a retiree.
The upside is, again, investing to get $500K isn’t necessarily going to be a huge burden. With 35 years of saving money at a 10% rate, you’d need to invest $153.74 per month to end up with $500K if you start saving at 30 and stop at 65. This should still be pretty easily doable for most people.
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Retiring with $1 million
Finally, ending up with $1 million is going to give you $40,000 in income from investments under the 4% rule. If your income is $100,000 or less, which is the case for many people, then this amount is reasonable to live on. You just have to make sure you can save enough to get there. Starting at 30, you can do it if you invest $307.48 per month consistently for 35 years. That’s a heavier lift than saving $76 or $153, but hopefully is still within reach.
Of course, you may decide that $40K in annual investment income as a retiree isn’t enough, so you may need more than $1 million. And you may be starting a lot later than 30, which means you need to increase your investing. The key is to realize that the more money you want as a retiree, the more you need to invest now to make it happen.
A financial advisor can help you set your nest egg and investment goals so you can make sure you follow the right path to the secure retirement you deserve.
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