Follow These 5 Steps to Reach $2 Million in Retirement Savings With an $80,000 Annual Salary
A nest egg of that amount may be within your grasp with enough time and a good strategy.
The 4 percent Rule is one of the most tried-and-true retirement planning recommendations. Simply put, the notion is that you withdraw 4% of your portfolio’s starting value in the first year of retirement. In succeeding years, you repeat the process, increasing the number to account for inflation. Following that method with a well-diversified portfolio increases the likelihood that your portfolio will last at least as long as your retirement.
With that as a guideline, 4% of a $2 million savings equals $80,000. That implies a $2 million portfolio should be able to entirely replace an $80,000 wage in a very sustainable manner over the course of a typical retirement. As a result, it’s a natural objective for someone earning $80,000 per year to aspire towards.
Indeed, with that amount of savings, once you count in your Social Security income, you’ll probably be taking home more in retirement than when you were working. Like many seniors, you too might be concerned that growing healthcare expenses will ruin your retirement plans. So, that extra cushion might be the deciding factor that’ll allow you to enjoy the golden years you’ve worked so hard for.
First, cut your costs
It’s feasible for someone earning $80,000 per year to accumulate a $2 million nest egg. Still, you must regularly invest over a lengthy period of time. And the better you manage your day-to-day expenses, the easier it’ll be to save money for investing.
A straightforward method to help on this front is to start by monitoring every dollar you spend for a few months. After that, go back through and designate each cost as red, yellow, or green.
Red category expenses are ones you don’t need or want to retain. These are oblivious purchases, automatically repeating charges for services you don’t use anymore, and similar. Green expenses are those that are both necessary and unavoidable, such as your mortgage payment or a recently signed lease. Yellow expenses are in the center. They are valuable enough so that you prefer not to remove them entirely. Still, you may have room and desire there to reduce your spending.
When it comes to red expenses, the decision should be simple: stop squandering money on these products. They aren’t essential nor necessary to you, and getting rid of them will allow you to put that money to better use. You may retain the green category as it is unless those costs alone put your budget overstretch. If you can’t make ends meet on the essentials while also putting money down for the future, you might want to consider more fundamental changes.
You’ll have some work to do with your yellow expenses. Sift through these to determine if there’re any methods to cut your spending while retaining the advantages you most want from them. Could you use a programmable thermostat to help you save money on utility bills? Could you make your own coffee or use the free workplace coffee instead of stopping at the coffee shop every day? Could you brown-bag your lunch a couple of days a week instead of eating out every day? Every penny you save is money you can put toward your long-term goals.
Second, pay back most of your debt
Once you’ve freed up some cash flow, your next move should be to tackle your debts. The debt avalanche approach is the most effective way to accomplish this. To use it, arrange your debts from the greatest to the lowest interest rate. Make the minimum payment on all debts except the one with the highest interest rate each month. Pay as much as you can each month on the loan with the highest interest rate until it is entirely paid off.
After you’ve completed the quick payback process with one loan, repeat the same with your next highest interest debt. Continue doing so until you have paid off the majority of your debts. You don’t have to be entirely debt-free to invest, and you certainly don’t want to put money into retirement accounts before you’ve paid off your home. However, any debts you maintain should have low-interest rates, reasonable monthly payments, and provide a clear purpose for your future. The mortgage is a kind of debt that fulfills all of these.
Why limit yourself to debt with low-interest rates? Because otherwise, you are effectively borrowing at a high interest rate to invest in assets that are expected to produce lower returns on average. You should make reasonable payments since you must meet your recurring expenses and debt service with money left over before you can properly invest. And you should only take on debt if you have a clear goal in mind for the future because you’ll be in it for the long haul, and your other priorities will shift over time. Using debt exclusively to benefit your future can help you manage your priorities along the road.
Third, make the most of any “free money” that comes your way
Once you’ve got your costs and debts under control, you’ll be ready to put some real money into investing. And, for many workers, the first investment to make if you have the chance is in a 401(k) or other employer-sponsored plans.
Specifically, if your company matches a portion of your contributions, strive to save enough to take advantage of every cent of those matching funds. That will give the highest “guaranteed” rate of return accessible to the vast majority of us ordinary mortals, and it’ll significantly help you to reach your goals.
Furthermore, if you choose between a Traditional and a Roth 401(k), consider carefully which one you want to invest in. If you want to retire with a $2 million balance, the immediate tax benefits available for contributions to a Traditional retirement plan can help you save more each paycheck. On the other hand, if you do hit your $2-million goal, the fees and taxes involved with early retirement withdrawals might make you wish you had done part of your investment through a Roth account when you had the opportunity.
Because of these trade-offs, there is no apparent winner between the two types. Still, if the only way to accomplish your objective is to take advantage of the immediate tax benefits provided by contributing to a Traditional plan, that’s the route you should pursue.
Fourth, set yourself on a path to accomplish your goal
The table below illustrates how much you’ll need to invest per month to reach your $2 million retirement goal, based on how many years you have until retirement and your portfolio’s rate of return. As this table plainly shows, if you start saving early on in your career and receive annualized returns that are close to the market’s historical norms, you may achieve your objective pretty easily. Indeed, you may be able to do that by investing in index funds that are passively managed, market-tracking index funds.
The challenge, though, is twofold. First off, the later you begin, the more difficult it will be to save enough to accomplish your objective. For example, suppose you start investing for retirement with just 15 years until you want to retire. In that case, you’ll need to save more than half your salary even to have a chance of reaching the $2 million threshold. Making the lifestyle changes necessary to begin investing half your pay would be a significant challenge.
Then, even if you choose low-cost index funds that are meant to produce average outcomes, there’s still no assurance that you’ll obtain those historical market average returns with your portfolio. As a result, you should check your progress regularly to see whether you need to adjust your savings level to stay on target. It’s far easier to make slight adjustments earlier in your journey than it is to try to bridge a large gap later in your career.
Fifth, keep it up but don’t forget to live your life
Recognize that once you’ve started saving for a $2 million nest egg, you’ll need to keep going for decades to get there. You’ll inevitably have difficulties along the road. Life happens, and you should have money set aside outside of your retirement accounts to handle unplanned situations and other priorities.
When you start accumulating a retirement nest egg, it might be tempting to dip into it to pay unexpected expenses, even if you incur taxes and penalties for early withdrawals. So, make sure you’re combining retirement savings with other life goals, and maintain a large enough emergency savings buffer just in case. That will also help you stay on pace with your retirement objectives.
Aim for the moon – if you miss, you’ll still end up among the stars
Even if your pay remains around the $80,000 range, adjusted for inflation, these five actions could bring you from $0 to $2 million over the course of your career. The beauty of it is that even if you come up a little short, you’ll be considerably better off than if you didn’t invest at all.
If you think about how much money you’ll need to retire, you’ll see that the remainder is a question of preference rather than need once your fundamental necessities are met. If you end yourself in the neighborhood of a multimillionaire, you’ll probably be able to cover your basic costs.
So get started today to increase your chances of a comfortable retirement. With enough time and a good strategy, you might be able to get there, even with an $80,000 annual salary.