Retiring with a $200,000 yearly income is a dream for many Americans. While it may seem like a lot of money, it is possible to achieve this goal with proper planning and discipline. The expected median retirement age for current workers is 65. If that’s the number for you, how do you manage your finances leading up to retirement so that you can enjoy an income of $200,000 per year? Here are some tips and strategies that you can take regardless of your current age.
Save early, save often!
Saving early is a no-brainer when it comes to having enough money in retirement. But it’s just as important to save smart.
Using the 4% retirement rule
The 4% retirement rule has become a trusted tool for many retirees to help determine how much they should spend in retirement. It's a simple and easy way to estimate how much you can withdraw from your retirement savings each year without running out of money. The rule states that you can withdraw 4% of your total retirement savings in the first year of retirement, and adjust that amount for inflation each year after that.
For example, if you have $500,000 in retirement savings, you can withdraw $20,000 in the first year of retirement. It's important to note that the 4% rule is just a guideline and may not work for everyone's individual situation. Using this rule as a starting point, if you want to withdraw $200,000 a year, you will need at least $5 million in your savings account by the time you retire. That may seem like a lot, but the earlier you start saving, the more time your money has to grow.
Try to save as much as possible, even if it means sacrificing a little bit now for a comfortable retirement in the future. Consider opening a 401(k) or IRA and contribute the maximum amount allowed per year. Take advantage of any employer matching contributions. You can invest even more by opening up a brokerage account.
How much do you need to save?
Now that you know how much you need by age 65, the next step is to calculate how much you need to save right now. Using a savings goal calculator and the desired savings of $5,000,000, $1,000 in your retirement accounts, and a 10% annual interest rate compounded daily, here is how much you need to save per month, depending on when you start.
- Age 20: $460 per month
- Age 25: $770 per month
- Age 30: $1,290 per month
- Age 35: $2,175 per month
- Age 40: $3,718 per month
- Age 45: $6,514 per month
If you are young, it is much easier to meet your retirement savings goal. This would likely involve setting up a budget and living below your means. It may mean downsizing your living space, driving a used car instead of a new one, or cutting back on unnecessary expenses. The more you can save and invest, the faster you can reach your retirement goals.
Start a business
Saving a couple of thousand dollars a month may not be realistic for many people, especially if you are starting later in life. Sixty percent of the world’s billionaires are self-made; only 10% inherited their wealth. While we hear of many young entrepreneurs hitting it big, there are many who had their career breakthrough later in life. For example Jack Ma, the founder of Alibaba, had his breakthrough at 35, Torstein Hagen of Viking Cruises was 54, and James Dyson of Dyson vacuum cleaners was 44. In fact, according to the Census Bureau, a 35-year-old is three times more likely to start a successful start-up than a 22-year-old.
What kind of business?
Billionaires often make their fortune by inventing something amazing. This might mean starting a new company or coming up with a product or service that people really want and monetizing it. By creating something new, you might change the whole industry and make a ton of cash.
Look for industries that are growing fast. High-growth industries usually have lots of opportunities to make money. Companies within these industries may experience high levels of consumer demand and rapid growth in revenue. Tech may be your best bet, as 93% of the people who became billionaires in the tech industry made their own fortune.
One business strategy that seems to work well for many billionaires is to get involved in the investment banking world, specifically mergers and acquisitions (M&A). The average U.S. billionaire has overseen or been involved in more than 33 M&A transactions, having grown or sold their businesses.
Consider passive income streams
Retiring doesn’t have to mean you stop earning an income. If you don’t have the $5 million in savings, you can look for ways to supplement your retirement income, consider a part-time job, or find ways to generate passive income. Passive income streams can supplement your retirement income without requiring you to work. For example, rental properties, dividend-paying stocks, or creating a blog or YouTube channel can all generate passive income.
Get involved in real estate
One of the best ways to achieve this is by investing in real estate. It can be highly profitable and have countless opportunities for growth. Some real estate investors have made billions. You can start small and gradually add to your portfolio to increase your chances of reaching your $200,000 retirement income goal.
Retiring on $200,000 a year is achievable, but it takes discipline, planning, and making smart financial decisions. Starting early, living below your means, starting a business, and exploring passive income opportunities are all vital strategies to help you reach this financial goal. Remember that every individual's personal finances are unique, and it is essential to create a personalized retirement plan that aligns with your goals and risk tolerance. Use these tips to help you secure your financial future and have the retirement of your dreams!
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