Money Girl

How to Retire With Over $100,000 of Annual Income

Episode Summary

Laura reviews planning variables and what it takes to retire with over $100,000 of yearly income.

Episode Notes

Laura reviews planning variables and what it takes to retire with over $100,000 of yearly income.

Transcript: https://money-girl.simplecast.com/episodes/how-to-retire-with-over-100-000-of-annual-income/transcript

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Episode Transcription

I believe that creating a comfortable retirement is the ultimate financial goal. That’s because it requires a considerable nest egg to provide a reliable income for life. However, determining how much to invest for retirement and what income you’ll need can be challenging.

This post will review key retirement planning variables, potential sources of retirement income, and the amount an average person or couple needs for a secure future. You’ll learn what it takes to retire with over $100,000 of annual income.

Welcome back to episode 936 of Money Girl–I appreciate you spending time with me! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter. I've been providing personal finance tips and advice on this podcast weekly since 2008, with over 44 million downloads.

You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Newsletter subscribers automatically receive my Money Success Toolkit with the exact templates I use to manage money.

How much do you need to retire?

Most people reach an age when they're ready to slow down or are unable to work due to poor health or lack of opportunities. A secure retirement is one that provides enough income to maintain your desired standard of living throughout your entire life.

Many financial planning experts recommend having at least 70% to 80% of your pre-retirement income after you stop working. For instance, if you earn an average of $100,000 per year in the years leading up to retirement, a good target is having at least $70,000 per year to be comfortable in retirement.

But if you have high aspirations for retirement, such as owning a second home, leaving a legacy, or traveling extensively, there's nothing wrong with planning for income that exceeds 100% of your pre-retirement income.

Let's cover some typical income sources and how much you'll need to ensure you never run out of money in retirement.

What are guaranteed income sources?

Before you can determine how much money you need to save for retirement, consider all your potential guaranteed income sources, such as a workplace pension or Social Security retirement benefits.

Social Security gets funded by payroll taxes and the self-employment tax. If you're an employee, you may see the deduction listed on your paycheck as OASDI, which stands for Old-Age, Survivors, and Disability Insurance.

However, if you’re a government or railroad employee, you’re typically covered by a different retirement system and qualify for a pension instead of Social Security. In addition, some large employers may offer a pension, but it’s become a rare benefit.

If you’re an eligible U.S. worker, you can claim Social Security once you pay into the system for a minimum of 40 quarters or ten years. The calculation for how much you'll receive in retirement is based on the average of your highest 35 years of earnings.

If you work fewer than 35 years, the missing years get factored into your Social Security calculation as $0 income. And if you worked more, only your highest-earning years will be considered.

The Social Security program taxes earnings up to an annual threshold, known as the wage base, which has increased over time. For 2025, the wage base is $176,100. The Social Security tax for employees is 6.2% of earnings up to that maximum. Plus, your employer also pays an additional 6.2% on your behalf.

If you're self-employed, you pay into the Social Security system at the full rate of 12.4% (6.2% + 6.2%), up to $176,100 of annual income.

In any year that your income exceeds the annual wage base, it's no longer taxed until the following year. For instance, if you earn $200,000 in 2025, you pay Social Security tax on $176,100 of income but not on the remaining $23,900.

In addition to your career earnings, the Social Security retirement benefit you receive varies depending on the age you claim it. If you were born between 1937 and 1959, your full retirement age is 66. But if you were born in 1960 or later, it's 67.

However, no matter when you were born, you can claim early retirement starting at age 62. The downside of claiming early is that you receive a permanently reduced benefit, so it isn’t always the right decision. However, if you absolutely need the income or have a short life expectancy, claiming early retirement can be a lifeline.

According to the Social Security Administration, if you fully retired in 2025 at age 66, the highest possible monthly benefit would be just over $4,000. But if you’re 62 in 2025 and take early retirement, you'd receive about $2,800 per month–that’s 30% less for the rest of your life.

A common strategy to permanently increase your retirement payout is to delay claiming benefits until age 70. For every year you delay benefits past your full retirement age (either 66 or 67) to 70, your Social Security payment increases by 8%.

If you retire at 70 in 2025, the maximum possible benefit is just over $5,000. That's about 25% more monthly income than claiming at your full retirement age. So, if you can wait several years to begin claiming retirement benefits, that’s an excellent way to lock in a higher income for life. However, as I mentioned, that’s not the best decision for everyone, so be sure to get professional guidance.

The monthly benefit amounts I mentioned reflect the maximum if you were a high earner throughout your career. If you’re more like a typical worker, here are the average Social Security benefits by age for 2024:

Early retirement at 62: $1,342
Full retirement at 66: $1,800
Full retirement at 67: $1,930
Delayed retirement at 70: $2,148

To learn more about Social Security, review your earnings history, and view your estimated future retirement income, create an online account at SSA.gov. Be sure your reported earnings are accurate because mistakes could keep you from receiving all the benefits you're entitled to.

How do you plan for retirement?

While many people will receive Social Security benefits in retirement, it’s typically not enough for a comfortable lifestyle. Remember that the program was designed to be a safety net, not a sole source of income for retirees. That's why investing for retirement is critical, especially if you don’t have a workplace pension to count on.

Here are ten key considerations to help you determine how much you need for retirement.

Your current age: The sooner you begin investing, the more compounding interest works in your favor to grow your balance. That means young investors can invest less than those who start later.
Your retirement age: The sooner you plan to take income from your retirement nest egg, the bigger it must be.
Your current retirement balance: If you already have an impressive retirement nest egg, you may be able to save less or nothing and still meet your goals. For instance, your investment balance will double approximately every ten years, even with no new contributions, if you earn an average return of 7%.
Your average pre-retirement investment return: For example, investing $200 per month for 40 years with a 3% average annual return would grow to about $185,000. But if you received an 8% return, it would grow to $700,000,

To get a good investment return and minimize risk, consider investing in passively managed, low-cost funds that are highly diversified. These might include index funds that aim to replicate the performance of a specific index or financial market, such as the S&P 500.

From the 1920s to 2024, the S&P 500 has risen an average of approximately 10%. Even if you earn less, you can accumulate a huge retirement account by investing consistently in an index fund.

Your average post-retirement investment return: Most retirees want to keep their nest egg growing. You might choose investments that offer relatively low returns but are considered safe, such as certificates of deposit (CDs) and bonds.
Your guaranteed income: Factoring in sources of lifetime income, such as pensions, annuities, or Social Security retirement benefits, is crucial for accurate planning. If you’re an average worker, Social Security may replace 30% of your pre-retirement income.
Future inflation: Since inflation causes prices of everyday goods and services to rise, it can make your retirement income less valuable. It's good to know that Social Security benefits get adjusted for inflation as the cost of living increases.
Your health and longevity: If you're relatively healthy at full retirement, statistics indicate that you'll likely live well into your 80s. If you have a good family health history and take care of yourself, you may need retirement income into your 90s.
Your withdrawal rate: The lifestyle you want in retirement and the amount you withdraw from your nest egg annually determine how long it can last. A good rule of thumb is to factor in annual withdrawals of 4% if you retire in your mid-to-late 60s.
Your account types: The tax status of your retirement nest egg makes a huge difference in how much you need to save. For instance, if a majority of your wealth is in a Roth account, your withdrawals in retirement will be tax-free. But if most of your money is in a traditional tax-deferred retirement account, you typically must pay income tax on withdrawals, leaving you with less to spend.

How can you retire with over $100,000 of income?

Let's say you earn $100,000 a year and want to retire at age 67 with the same amount of pre-tax income for life. Suppose you don’t have a pension but have paid into Social Security for decades and will receive approximately $30,000 per year after claiming benefits at your full retirement age of 67. Therefore, the remaining $70,000 must come from your savings and investments.

I mentioned that a 4% withdrawal rate is a good rule of thumb for someone in their 60s who’s in good health. By dividing your desired income by 0.04, you determine the total savings needed, which is $1.75 million ($70,000 / .04).

Once you have a retirement savings target, you can determine how much to save based on your current age and retirement balance. For instance, if you’re 27 and have $0, you’ll need to save approximately $660 per month with an average annual return of 7%. You can plug your information into a retirement calculator at Dinkytown.com to crunch the numbers.

Using a ballpark estimate for retirement can be useful for long-term planning. However, if you’re approaching or entering retirement, you should work with a financial advisor to fine-tune your plan. They can help you understand when to claim Social Security, how to cut taxes, and the best withdrawal rate to ensure you don’t outlive your money in retirement.

That's all for now. I'll talk to you soon. Until then, here's to living a richer life!

Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, and Nathaniel Hoopes is our marketing contractor.