How to Retire with $2 Million on an $80,000 Salary | Personal finance

(Chuck Saletta)

If you’re following a retirement planning guideline known as the 4% rule, you’ll want to retire with a portfolio that’s 25 times the amount you expect to withdraw from your accounts in your first year of retirement. If you follow the plan described by this guideline, you should be able to see your nest egg last at least until a 30-year retirement, while adjusting your withdrawals for inflation each year. In this setting, a $2 million portfolio should be enough to completely replace an $80,000 salary.

This begs a big question: how do you build that $2 million nest egg on an $80,000 salary? After all, if you want to retire with this type of portfolio, you need to be able to grow it over your career. It’s easier said than done, but it’s possible if you start planning early enough.

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The math that gets you there

The following chart shows how much needs to be invested on your behalf each month in order to get that $2 million nest egg. The main things it depends on are the average rate of return you earn and how many years you have to invest to get there.

Years to come

10% annual return

8% annual returns

6% annual returns

4% annual return




































Recognize the importance start early is when it comes to reaching that $2 million nest egg. If you start saving with your first paycheck, reaching that milestone at typical retirement age is fairly straightforward. This remains true even if future annual market returns do not reach quite the same level of around 10% that they have historically. Wait until later in your career and you will have to start depending on both higher returns and larger contributions to have a chance of making it happen.

You don’t have to do it alone

Notice how I wrote “must be invested on your behalf” above. It’s different from “you have to find out of pocket”. It also shows how you can take advantage of the tools your boss and Uncle Sam might give you to help you achieve this goal more easily.

One of the main such tools is an employer-sponsored 401(k) or similar retirement plan. The money you accumulate in these plans is tax-deferred as long as it remains in the plan. In a Roth-style plan, you can even withdraw your money tax-free once you reach normal retirement age. On the other hand, in traditional style, you get an immediate tax deduction for your contribution.

In addition to the tax advantages, many employers offer matching contributions to 401(k) plans, which means that if you contribute money for your retirement, your boss will too. This combination of employer support and tax advantages can save you enough to reach that $2 million nest egg when you retire.

How these benefits stack up

A typical 401(k) match is 50% of your contribution, up to 6% of your salary. In other words, with that $80,000 salary, if you save $4,800 per year ($400 per month) to your 401(k), your boss will add an additional $2,400 per year ($200 per month) to your account. . This instantly brings the amount contributed on your behalf to $7,200 per year ($600 per month), which is a great start to your savings journey.

In addition, if you contribute to a Traditional 401(k) style, you get that immediate tax deduction. Let’s say you’re in the 22% federal tax bracket and the 3% state tax bracket. The tax deduction would reduce approximately $1,200 per year ($100 per month) of taxes you must pay on your income. Combine tax relief and employer matching and $7,200 per year ($600 per month) is spent on your behalf, at a cost to you of only $3,600 per year ($200 per month).

If you start early enough in your career, that amount alone could propel you toward that $2 million nest egg when you retire. Otherwise, don’t despair. If you’re under 50, you can save up to $20,500 a year in your 401(k). If you are 50 or older, this limit increases to $27,000.

Start now to increase your chances of success

Also, if you’re employed and under age 50, you can typically contribute $6,000 a year to a tax-advantaged retirement plan called an IRA. If you’re 50 or older, IRA contribution limits reach $7,000 per year. Between an IRA and a 401(k), you can save between $26,500 and $34,000 a year — more regardless of your employer — in a tax-efficient way to help you reach your $2 million goal.

If even that’s not enough, you can save an unlimited amount in a standard brokerage account. Of course, it’s important to note that $34,000 is 42.5% of an $80,000 salary. If you’re able to save that much while you’re working, do you really need to hit that $2 million nest egg to sustain your lifestyle in retirement?

Indeed, it’s much easier – and more convenient – to start saving earlier in your career than trying to save massively later in your working years to try to catch up. You’ll never have more time to retire than now, so start now and improve your chances of hitting that $2 million nest egg when you retire.

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Chuck Saletta 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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