Making a six-figure salary has a nice ring to it. But figuring out how to generate $100,000 in retirement income and replacing that old paycheck can be challenging. The first step towards this goal, of course, is to do the math to estimate how much you need to have saved in your away 401(k) to create a $100,000 paycheck. Your goal, of course, is to cover essential expenses like housing costs, gas, food and electric bills — as well as be able to pay for fun stuff like eating out, going on vacation, or affording a home at the lake, beach, or mountains.
What savers think they need to retire comfortably is all over the place. But the magic number is typically north of $1 million, according to industry studies. A study by Schroders says savers think they need $1.2 million socked away. A Northwestern Mutual study ups the ante to $1.46 million. And retirement savers responding to a Charles Schwab survey set an even higher bar: $1.8 million. But those guesstimates are just what people think they will need to save to pay the bills and live a fulfilling life in their golden years. If you know you’ll need to produce six figures on your own each year in retirement, you’ll have to work your way back to figure out how big an account balance you’ll need for your portfolio to throw off $100,000 in income.
A few simple rules of thumb can help you develop a savings target that will boost your chances of a secure retirement and allow you to fund the lifestyle you covet in your golden years.
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Withdraw $100K a year with the 4% rule
Let’s say you follow the popular 4% rule. This means you’ll withdraw 4% of your portfolio in year one of retirement and $4% plus inflation adjustments in future years. This strategy is designed to make your money last 30 years.
Here’s how the simple math goes:
Annual income / % of portfolio withdrawn annually = Savings needed to retire comfortably
So, if you want six figures in retirement income, here’s what the calculation looks like:
$100,000 / 0.04% = $2.5 million
No doubt, that’s a big lump sum to get your arms around. But remember, your savings are only needed to fill the so-called “income gap” that arises after your other sources of income are added to the equation, such as Social Security or, if you’re lucky, a work pension.
Let’s say you will take home the average monthly Social Security retirement benefit of $1,976, according to January 2025 estimates from the Social Security Administration. That equates to roughly $24,000 in additional income. (Keep this government-funded benefit in mind when you are deciding when to start taking Social Security, as the longer you wait, the bigger your benefit check will be and the fewer dollars you will need of your own savings to generate income.) So, if you subtract that from your $100,000 total, you now need to generate only $76,000 of income with your own savings.
Here’s how the math changes and relieves some of the heavy lifting you have to do with your own portfolio.
$76,000 / 0.04% = $1.9 million
That’s still a lot of dough to save, but it’s a half-million bucks less. Sol, that’s promising.
Let’s say you also have a work pension that pays you $2,000 a month, or $24,000 each year, in income. Now you need to generate just $52,000 of income on your own.
The math gets a lot easier to stomach.
$52,000 / 0.04% = $1.3 million
A key aspect of zeroing in on how much your portfolio can generate in income and what types of assets you must invest in to reach your withdrawal hurdle rate is the annual return you earn, notes James Ritzema, senior portfolio analyst at Baird. For example, in today’s world of higher interest rates, it’s not hard to get a 4% return without taking tons of risk. “You have an environment where it’s not hard to get a 5% yield from a high-quality bond portfolio,” said Ritzema. But that wasn’t the case a few years ago when interest rates were at zero, and savers and retirees needed to take additional risks to generate the return needed to fund their income needs. “Starting yields are really the thing that’s going to be the best determinant of the income you’re going to be able to generate.”
The rule of $1,000
Another back-of-the-envelope way to determine how much you need to save to retire comfortably is the rule of $1000. This rule states that for every $1,000 per month in income, you need to save $240,000. That means you would need to save about $2.4 million to generate $100,000 per month in income.
Now that you know roughly the size of the account balance required to pay for stuff after you stop working, you’ll need a roadmap as to how to accumulate those precious dollars that will buy you financial freedom in retirement.
Build a diversified portfolio
Don’t go too conservative and put all your money into less volatile fixed-income assets like bonds as you near or enter retirement. Invest for growth and income. “You still want a mix of stocks and bonds,” said Ritzema. “You want to still have the potential for capital appreciation.” Over the long haul, stocks produce bigger returns, which help you outrun inflation and grow your portfolio, as all the money in your portfolio doesn’t need to be tapped for income all at once. When you account for inflation, which is around 3%, now that $100,000 in income only generates $97,000 in purchasing power, Ritzema explains.
The types of assets you invest in on the fixed-income slice of your portfolio are also important to help you boost your income. With the economy solid, for example, owning a slice of so-called junk bonds, or non-investment grade debt, yielding around 7% will help boost income in the portfolio, says Ritzema.
It’s always nice to have a portion of your portfolio that can generate all the income you’ll need without being subject to market volatility, says Daniel Milan, managing partner at Cornerstone Financial Services. Ideally, “you don’t want to sell shares of some asset (when they are selling at depressed prices) to generate income,” said Milan. “That’s what creates additional risk in distribution years.”
When it comes to income planning, Milan likes to start the transition from the accumulation stage of retirement saving to the so-called distribution phase or withdrawal period. “We transition to a blend of dividend-paying stocks (60% of portfolio), some fixed income (20% of asset mix), and a sleeve of private market credit investments (20%), which generates higher income streams than traditional fixed income,” said Milan. Investors can get exposure to this private credit via funds that specialize in floating-rate bank loans, whose yields rise when market rates increase. “It creates a hedge against inflation,” said Milan. The benefit of investing in dividend-growth stocks, Milan adds, is that these companies typically have strong underlying fundamentals and increase their dividends every year. “You need to have a growth rate of your dividend yield that’s increasing at a rate higher than inflation,” said Milan.
Max out and play catch-up
In your savings years, take advantage of employer-sponsored retirement savings accounts like 401(k)s and individual retirement accounts (IRAs) and save as much as possible. Maxing out your contributions each year and taking advantage of catch-up contributions if you’re 50 or older can help you get closer to your savings goal. The maximum contribution limits in 2025 for 401(k) plan participants under 50 is $23,500. If you are 50 or older, you can sock away an additional $7,500. And, starting in 2025, if you are between the ages of 60 and 63, you can save $3,750 more in super-catch-up contributions. The maximum contribution for IRAs this year is $7,000, with savers 50 and older able to contribute an additional $1,000 in catch-up savings.
Control spending if necessary
If it seems too daunting to hit savings targets required to create an income stream of $100,000 each year, then it might be necessary to tighten your budget a bit so you can trim your income needs to a more doable level, says Ritzema. “One of the things that you can control as an individual (is your spending) and maybe living below your means for a while,” said Ritzema. “See how that feels, (especially) if you’re looking for retirement account to generate a smaller income stream. That’s certainly something to think about.”
Milan says the biggest impediment to retirement savers to meeting their goals is not sticking to their savings plan over time. “The financial plan only works if you commit to the savings plan over the next 20 years or so,” said Milan. “Two million dollars is not a small thing to accumulate.”
But Milan stresses that not all your income in retirement must come from your 401(k) or IRA. “All future income sources should come into the (magic number savings) calculation,” said Milan. “But you first need to determine what that number is. What you really need to determine is what is the future dollar amount that I need to live on in retirement. Whatever your income gap is from fixed sources of income, you need to save in your own accounts to close that gap.”
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