In a recent meeting with some long-term clients, we began updating their comprehensive wealth plan. I vividly remember their specific goal. They wanted to reach retirement with an annual income of $100,000. Years ago when their journey to their financial independence began, this number was out of reach. Today, due to their hard work and persistence, this goal is actually becoming a reality. If you’re asking yourself, “What did they do? Can I retire with $100,000 per year in income?”, then let’s take a look at how you get there.
Lately, many people are joining the FIRE (Financial Independence, Retire Early) movement. These people’s goal is to have enough money in their savings and investment accounts by the time they’re in their 40’s or early 50’s to fund reasonable expenses for the rest of their lives. Honestly, that’s what all retirees want, my clients included. They don’t want to work anymore, but they need enough money coming into their household accounts to cover their expenses. So whether you want to retire early or just plain retire at all, you’ll do the same math to get to 100000 per year.
The Math to Retire with $100,000 a Year in Income
The particular clients I mentioned earlier are projected to have roughly a million dollars in retirement account assets when they stop working. If we apply the 4% rule to this amount, they can expect $40,000 in retirement income from their asset accounts.
$1,000,000 x .04 = $40,000
(Assets x 4% = Projected Yearly Income)
Social Security will account for roughly another $40,000 per year, which isn’t an unreasonable benefit amount for those in the middle-class. So far we’ve got around $80,000 a year expected during retirement.
$40,000 + $40,000 = $80,000
(Yearly Income from Assets + Yearly Income from Social Security = Projected Yearly Income)
If you’re trying to reach 100k, that’s a $20,000 shortfall. Here’s how we intend to make up for it.
Preparation for Retirement – Be Cautious
In the meeting, the clients also asked questions to try to keep from losing income in their retirement accounts. My advice? Stay away from financial products with high costs – these products boost the financial (sales) person’s bottom line and not yours. This is the buyer-beware list I give my clients:
- Beware of IRA's or 401K's.
- Beware of Mutual Funds with a Load.
- Watch out for Propriety Mutual Funds.
- Stay away from financial products which say “you can’t lose.”
- Don’t take on too much risk, but also don’t be afraid to take on risk altogether. This can be a little tricky, as your specific financial plan dictates the risk you’re going to need to take to reach your financial goals.
- Live your life. You can’t take the money with you, so spend the retirement income in the lifestyle you choose.
Adding Extra Income after Retirement
We came up with a game plan for bringing in additional income. Here are some ideas we discussed. If you’re in a similar situation, some of these may apply to your specific needs.
- What assets outside of your retirement account you can use?
- Will you consider working part-time in your early retirement years to supplement your income?
- Is there an old pension available to make up a portion of the shortfall?
- Are you willing to delay retirement for a couple of years to increase your per-year income?
- Can you sell or rent some “toys” (or liabilities) to help fund your bank account in retirement?
- Is downsizing your home and using some equity an option to offset your shortfall?
- Do you have time to start a small business to help provide additional income?
The 4% Rule
In 1994, William Bengen, a financial adviser, conducted an exhaustive study on historical returns. He focused heavily on the downturns of the 1930s and 1970s. Even though the study predated the 2001 and 2008 market “crash”, I’m confident that the conclusion of this study is still applicable today. Benger found that no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years. Now, this is just a rule of thumb, and your specific retirement plan may dictate a different scenario.
So, yes, you can retire with $100,000 a year in income
So, it is actually possible to reach your goal if you build a realistic plan and you’re willing to work hard. Do you need help building a plan based on your unique situation? Consider employing a CERTIFIED FINANCIAL PLANNER™ to keep you on track and offer even more options that drive you toward that goal. And be sure to pick a planner who is operating as fiduciary on your behalf.