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Is a $100,000 a Year Retirement Doable?

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Is a $100,000 a Year Retirement Doable?

A recent New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be.  While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think.  That said I wanted to take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years.  This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool.  At you own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick estimating tool let’s see how someone with a $1 million combined in their 401(k) s and some IRAs can hit $100,000 (gross before any taxes are paid).

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule.  This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds

Annual income

Retirement account withdrawals

$40,000

Social Security

$40,000

Need

$100,000

Shortfall

$20,000

 

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide.  Here are some ways this gap can be closed:

  • If they have significant assets outside of their retirement accounts these funds can be tapped.
  • Perhaps they have one or more pensions in which they have a vested benefit.
  • They may have stock options or restricted stock units that can be converted to cash from their employers.
  • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
  • If they were business owners they might realize some value from the sale of the business as they retire.
  • If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
  • It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

  • Avoid high cost financial products that often do more to boost the bottom line of the financial sales person than that of their clients.
  • Likewise don’t give into the fear mongers peddling financial products like Equity Index Annuities or similar products “that can’t lose.” 
  • Don’t be too cautious with your investments in retirement, inflation is a retiree’s worst enemy.
  • On the flip side don’t take on excessive investment risk in an effort to catch up if you feel that you are behind where you need to be. 

The scenario outlined above is hypothetical but very common.  As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

If you’d like to discuss your retirement planning situation please contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Also check out our Resources page for more tools and services that you might find useful.

Photo credit:  Flickr

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Comments

  1. Andy says:

    Given that the majority of people nearing retirement age have far less than $1 million in savings, dramatically reducing spending at retirement is the only hope for any retirement at all. I think we are going to see a lot of people migrating to cheaper rural areas and low cost of living countries to facilitate retirement.

    • Roger Wohlner says:

      Andy thanks for your comment and I agree with you in many cases. We are seeing a fair amount of flight to lower cost of living areas already whether rural or in other parts of the country or the world.

  2. tyler says:

    If you invest the max 17,500 for 40 years you will accumulate 3,500,000 assuming interest of 7%. Using the 4% rule that would account for a 140,000 a year retirement for 30 years without including social security

  3. Mohammad Chughtai says:

    I’m trying to understand who the heck needs $100,000 per year, *after* he/she retires… What are you spending your money on? You don’t need 2 cars any more because you’re not working. Taxes are way lower because most of your income is cap gains. I assume after working so long your house is paid off (or mostly paid off). What the heck are you blowing $100,000 on then??

    • Roger Wohlner says:

      Thanks for the comment Mohammad. Fair question. Like much of what I write about this was based upon questions I’ve been asked over the years and folks I’ve worked with. Let me ask you what is a reasonable level of retirement spending in your opinion?

      • Lisa says:

        Pretty much every person in the United States can live off of much less than $100,000 per year in retirement if they make the decision to do so. For example, I am a single person (not in retirement). I spend about $4000 per month for everything. And that, in my opinion, is rather wasteful. I’ve been trying to cut back. That $4000 per month includes a mortgage, student loan payment, iPhone plan, cable TV, too many trips to restaurants, and a lot of other spending I probably don’t need. Even at first glance, “frugal me” should get rid of cable TV and switch to Hulu Plus and Netflix/Amazon Prime, move to a lower cost phone plan, and start eating out less. But let’s forget that for a moment and say $4000 for a single person not in retirement is “pretty good” (which would be the belief for most of America, given the way we consume). Let’s double that for me and a spouse. That’s $96,000 per year for two people.

        But wait! There are common expenses (mortgage and utilities, for example). Also, by the time I retire I won’t have student loan payments. So expenses for two people will probably be around $60,000 — and that’s with the cable TV, luxury phone plan, etc. Now, granted, I live in a fairly inexpensive part of the country (not super inexpensive, but not bad). Even assuming my mortgage doubled, retirement for two isn’t $100,000 per year.

        Now, that’s not saying people can’t get to $100,000 per year easily. Americans spend a lot of money we don’t need to spend. We tend to think “wants” are really “needs.” That’s one of the problem with retirement in America. We’re a very spendy bunch. The biggest problem with retirement in America, however, is that a lot of people just don’t plan for it at all.

        • Roger Wohlner says:

          Lisa thank you for your comment. First let me say the post was more about going through the math of retirement rather than saying any particular number is right or wrong. That said I agree that for many a comfortable retirement can be had on far less than $100,000 per year. To me people need to be realistic about what their financial resources will support and as you say try to eliminate some of the waste that most of us have in our ongoing spending. At the end of the day a financially successful retirement is about planning.

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