How To Retire With $1.2 Million On A Salary Of $75,000 | Smart Change: Personal Finances

(Selena Maranjian)

How much do you need to comfortably retire? This will vary by individual or couple, depending on their situation. If you are planning retirement income, you may need to save less. If you don’t have a pension and want to do a lot of traveling around the world, you might want to save more.

Suppose you earn $75,000 and want to retire with $1.2 million. Here’s how you could do it.

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Why $1.2 million?

Depending on your projected retirement needs, you may want to have $1 million to $2 million (or more) available for retirement. This is especially true if you are still many years away from retirement. While $1 million might sound great right now, 25 years from now it might have a purchasing power of only $500,000 because of inflation. For many years, inflation has averaged around 3% per year, although it can be much higher (or lower) in some years, as has been highlighted recently.

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You will need to have a retirement withdrawal strategy, which tells you how much you can withdraw from your nest egg each year with a low probability of running out of money. For example, one strategy is the 4% rule, which assumes your portfolio has 60% of its assets in stocks and 40% in bonds and requires you to withdraw 4% of your assets in your first year of retirement and adjust subsequent withdrawals for inflation. .

It’s not perfect — for example, maybe you don’t want your portfolio to be 40% in bonds; if the market is heading south for a while, you might want to take out less, not more.

Nevertheless, the 4% rule can be a handy rough guide when planning. If you want to play more conservatively, which isn’t a bad idea, you can change the initial withdrawal from 4% to 3.5% or even 3%. If you don’t mind taking a riskier approach, you can change it to 4.5%.

With $1.2 million, this 4% withdrawal equals $48,000 in the first year. On top of that, you’ll likely have at least some Social Security benefits. The average monthly Social Security retirement benefit was recently $1,668, or about $20,000 a year. You may well collect more than that. If you receive, say, $30,000 and have $48,000 from your own coffers, that’s an annual income of $78,000, which is close to what you earned before retirement.

It all comes down to math

Here’s exactly how you could raise that $1.2 million (or more):

Growth of 8% per year for

$10,000 invested annually

$15,000 invested annually

$20,000 invested annually

5 years

$63,359

$95,039

$126,718

10 years

$156,455

$234,683

$312,910

15 years old

$293,243

$439,865

$586,486

20 years

$494,229

$741,344

$988,458

25 years

$789,544

$1,184,316

$1,579,088

30 years

$1,223,459

$1,835,189

$2,446,918

See? This can be done if you save $15,000 per year for about 25-26 years and your nest egg grows at an average annual rate of 8%. Not everyone manages to save $15,000 annually, but a little creativity and determination could help you get there. You could, for example, take a side gig to increase your income.

If you can save even more than $15,000 a year, you’ll end up with a bigger nest egg. (Check out the numbers in the $20,000 column!) Letting your money grow for more than 25 years can also help you end up with more, as you can see in the $10,000 column.

If you have less than 25 years left to grow your portfolio, you can still make your retirement more comfortable by saving aggressively and investing effectively.

How to invest your money

Saving and investing for years is important, but how should you invest those crucial dollars? The easiest way to take advantage of long-term stock market growth is to invest money in one or more low-cost index funds, such as those that track S&P500.

The stock market has averaged annual gains of around 10% over long periods of time, and if you invest in a broad index fund, you’ll get a return close to the same return as the market, whatever it is during your lifetime. particular investment period. Frame.

If you also want to invest in some individual stocks, you can add dividend-paying stocks to your portfolio as they can perform well over time. And most will keep pouring money into your account even when the economy crashes. Note that many index funds will also pay dividends, if the stocks they hold do. The SPDR S&P 500 ETF (NYSEMKT: SPY)for example, recently reported 1.4%.

To aim for even better growth rates than offered by the broader stock market, consider adding growth stocks to your portfolio, tied to companies that are growing at faster than average rates. Consider following The Motley Fool’s investment philosophy, which suggests owning 25 or more stocks and holding them for at least five years. This can give even overvalued stocks a chance to rise – or fall, then recover.

Take the time to figure out how much money you’ll need in retirement, then make a solid plan to get there. You can probably raise a lot more than you thought possible if you take a few steps now and then stick to your plan.

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Selena Maranjian has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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