Having enough retirement income allows you to enjoy your later years without worrying about paying for the essentials. The specific amount you’ll require depends on your pre-retirement earnings, the expenses you’re committed to, and the lifestyle you want.
So, what if you decide you need $50,000 a year in retirement income? What must you do to ensure that your investments produce enough?
Getting $50,000 in annual retirement income
To determine how big your nest egg must be in order to produce $50,000 a year, you’ll first need to know what your withdrawal rate will be. If you take too much out of your investments too quickly, there won’t be enough left to earn returns.
One common rule of thumb, called the 4% rule, suggests you can safely take out 4% of your invested funds in the first year of retirement and then adjust withdrawals each year based on inflation and have your money last at least 30 years. With longer life spans and lower future projected returns, though, this rule could still leave you running out of cash. So it might be better to follow a 3% or 3.5% rule to be more conservative.
If you plan to withdraw 3.5% of your account balance each year and want $50,000, you’d need a nest egg equal to around $1.43 million. If you plan to follow a 4% rule, on the other hand, $1.25 million would be enough. Since there’s a difference of $180,000 between these numbers, it’s easy to see why setting your withdrawal rate is crucial to ensuring you have enough invested to produce $50,000 in annual income.
After you’ve calculated the size of your required nest egg, it’s time to determine how much to invest each month to save enough. And this depends on many different factors including the age when you plan to retire, how old you are when you start saving, and how conservatively or aggressively you plan to invest.
If you want a nest egg of $1.43 million, have 20 years left to invest, and plan to be conservative in your investments and earn just a 7% average annual return, you’d obviously need to invest a lot more than if your goal is $1.25 million, you have 30 years to save, and you anticipate a 10% average annual return. In the first scenario, you’d need to save $2,907 per month; in the second, you’d need to invest just $633.
Again, the big differences in the numbers here show why it’s so important to create a personalized investing plan if your hope is to have $50,000 in retirement money. The calculators on Investor.gov can help you set your savings target and determine what you must invest monthly to achieve it.
As they’ll make clear, amassing a portfolio large enough to offer you $50,000 in annual income will take a big investment if you start late and plan to invest conservatively. If you start saving as early as you can and build a balanced portfolio that exposes you to an appropriate level of risk, you can reasonably invest enough to produce the necessary income at a safe withdrawal rate.