It seems counterintuitive but having a higher income could make it harder for you to save enough to retire. Let’s look at two couples.
Couple 1:
Age: 45
Retirement Age: 65
Income: $400,000/year
Savings To Date: $500,000
Retirement Income Goal: $300,000/year (today’s dollars)
Less: Estimated Social Security $50,000/year*
Amount Needed from Investments: $250,000/year (today’s dollars)
Investment Income Needed 1st Year of Retirement: $547,866**
Annual Investment Needed***: $177,000
% of income to invest to meet Retirement Goal: 44%
Couple 2:
Age: 45
Retirement Age: 65
Income: $80,000/year
Savings To Date: $100,000
Retirement Income Goal: $64,000/year (today’s dollars)
Less: Estimated Social Security $40,000/year*
Amount Needed from Investments: $24,000/year (today’s dollars)
Investment Income Needed 1st Year of Retirement: $52,587**
Annual Investment Needed***: $13,000
% of income to invest to meet Retirement Goal: 16%
*Social Security could be reduced for higher income taxpayers in the future
** Assumes Inflation of 4%/year and Investment Return of 8% per year
***Increased by inflation rate each year.
The high income Couple needs to save 44% of their income vs. 16% for the moderate-income couple. Why? For the moderate-income couple Social Security will pay a much greater percentage of their retirement income. The Social Security tax is almost like forced retirement savings. The higher income couple is on their own to invest for retirement.
The message: If you have an income in this range or higher, it is even more important to invest a substantial portion of your income for retirement and not to let the fact that you can “afford” things now lead you to establish a lifestyle that will be unsustainable in retirement.