How to Retire With $2 Million on an $80,000 Salary

One of the most time-tested guidelines for retirement planning is the 4% Rule. Put simply, the idea is that in the first year of your retirement, you withdraw 4% of the starting balance of your portfolio. In subsequent years, you do the same, adjusting the figure upward to account for inflation. Following that strategy with a well-diversified portfolio gives you a great chance of having your portfolio last at least as long as your retirement does.

With that guideline in mind, 4% of a $2 million nest egg works out to $80,000. That means that a $2 million portfolio should be sufficient to completely replace an $80,000 salary in a fairly sustainable way throughout a typical retirement. That makes it a natural goal for someone with an $80,000 salary to strive toward.

Indeed, with that savings level, once you factor in your Social Security income, you’ll likely be taking home more as a retiree than you were when you were working. If you, like many seniors, are worried about rising healthcare costs derailing your retirement plans, that extra buffer could be the difference-maker in enabling you to enjoy the golden years you’ve worked so hard to reach.

First, get your costs down

It’s possible for someone earning $80,000 a year to build up a $2 million nest egg, but to do so, you’ll need to invest consistently for a long time. And the better you manage your everyday costs, the easier it will be to come up with money to invest.

One straightforward way to help on that front is to start by spending a few months tracking every dollar you spend. Once you’ve done that, go back and label every expense as either red, yellow, or green.

Expenses in the red category are ones you have no need or desire to keep — absent-minded purchases, automatically recurring charges for services you no longer use, etc. Green expenses are ones that are vital and nonnegotiable, like your mortgage payment or a lease you just signed. Yellow expenses are the ones in the middle — things that are valuable enough to you that you’d rather not eliminate them altogether, but where you might have room and willingness to cut back your spending.

For red expenses, the choice should be easy — stop wasting money on these items. They’re not important to you, you don’t need them, and eliminating them from your life will allow you to put that cash to better use. The green category, you can keep as is — unless those expenses alone leave your budget overstretched. If you can’t both make ends meet on the basics and sock some money away for your future, you may want to start thinking about more fundamental adjustments.

When it comes to your yellow expenses, you’ll have some work to do. Look at these carefully, and see what ways exist to reduce your spending while keeping the benefits you most want from them. Can you use a programmable thermostat to help lower your utility costs? Can you either brew your own coffee or take advantage of free office coffee instead of making a daily stop at the coffee shop? Can you brown-bag it a few days a week instead of buying lunch out every day? Every little bit you save is cash you can redirect toward your long-term goals.

Second, pay off most of your debts

Once you’ve freed up a bit of cash flow, your next step should be to get your debts under control. The most efficient way to do that is the debt avalanche method. To use it, line up your debts from highest interest rate to lowest interest rate. On all debts except the highest interest rate one, make the minimum payments each month. On the highest interest rate debt, pay as much as you can manage each month until it is completely paid off.

Once you’ve done that with one debt, repeat the fast payoff process on your new highest rate debt. Keep that up until most of your debts are retired. You don’t need to get all the way out of debt to invest — you certainly don’t want to wait to start putting money into your retirement accounts until you’ve paid off your mortgage. But any debts you keep should be ones that, like a mortgage, carry low interest rates, have reasonable monthly payments, and serve a clear purpose for your future.

Why only allow yourself to carry low-interest-rate debt? Because otherwise, you are essentially borrowing at a high interest rate to invest in assets that are likely, on average, to deliver comparatively lower returns. You should keep your payments reasonable because you need to be able to cover your recurring costs and your debt service with money left over before you’ll be able to successfully invest. And you should only take on debt with a clear purpose for your future in mind because you’ll be at this for the long haul, and your other priorities will change over time. Using debt only in ways that serve your future will help you manage your priorities along the way.

Third, take advantage of all the “free money” you can get

Once your expenses and debts are under control, you’ll be better able to put some serious cash toward investing. And for many workers, the first investment you should make — assuming that it’s an option for you — is in a 401(k) or other employer-sponsored plan.

Specifically, if your employer matches some portion of your contributions, aim to put away enough to get every penny of those matching funds that you can. That will provide the highest “guaranteed” rate of return available to most of us mere mortals, and it will go a long way toward helping you reach your goal.

In addition, if you have a choice between a Traditional and a Roth 401(k), think seriously about which type you want to invest in. If you’re aiming for a $2 million balance when you retire, the immediate tax deductions available for contributing to a Traditional retirement account will help you save more each payday. On the flip side, if you do reach that $2 million target, the costs and taxes associated with your withdrawals in retirement could be enough to make you wish you had done some of your investing via a Roth account when you had the chance.

These trade-offs mean there’s no clear-cut winner between the two varieties. Still, if the only path that will let you reach your goal is to take the immediate tax deductions provided by contributing to a Traditional plan, then that’s the choice you should make.

Fourth, put yourself on a path to reach your goal

The table below shows how much you will need to invest each month to reach your retirement goal of $2 million, depending on how many years you have until you retire and what rate of return your portfolio achieves. As this table clearly illustrates, if you can start saving early in your career and earn annualized returns that are near the market’s historical levels, reaching this goal can be fairly straightforward. Indeed, you might just be able to reach it by investing in passively managed, market-tracking index funds.

Years to Go Before Retirement

Required Monthly Contribution at 10% Annualized Return

Required Monthly Contribution at 8% Annualized Return

Required Monthly Contribution at 6% Annualized Return

Required Monthly Contribution at 4% Annualized Return

45

$190.80

$379.18

$725.70

$1,324.97

40

$316.26

$572.91

$1,004.28

$1,692.11

35

$526.79

$871.89

$1,403.80

$2,188.83

30

$884.77

$1,341.96

$1,991.02

$2,881.64

25

$1,507.35

$2,103.00

$2,886.03

$3,890.08

20

$2,633.77

$3,395.47

$4,328.63

$5,452.94

15

$4,825.44

$5,779.71

$6,877.14

$8,127.10

Table by author.

The challenge, however, is twofold. First, the later a start you get, the tougher it will be for you to save enough to reach your goal. For instance, if you begin investing for retirement with only 15 years left before you plan to stop working, you’ll need to set aside more than half your salary to even have a chance of getting to the $2 million mark. And making the lifestyle changes required to start investing half your salary would be quite a feat.

Second, there’s no guarantee that you’ll actually earn those historical market average returns with your portfolio — even if you pick low-cost index funds that are designed to deliver average results. Therefore, you’ll want to regularly review your progress to determine if you’ll need to adjust your savings level upward to keep you on track. It’s much easier to make small corrections earlier in your journey than it will be to try to close a major gap when you’re closer to the end of your career.

Fifth, keep it up — and live your life, too

Recognize that once you’re on the path to building a $2 million nest egg, you’ll need to keep saving for decades to reach that goal. Invariably, you’ll face challenges along the way. Life happens, and you’ll want to make sure you’ve got money saved up outside of your retirement accounts to cover both unexpected events and other priorities.

Once you start building a retirement nest egg, it can be tempting to tap into it to cover other costs that come up, even if you will face taxes and penalties for withdrawing that money early. So make sure you’re balancing saving for retirement with saving for other life priorities, and be sure to keep a large enough emergency savings buffer, just in case. That will give you a better shot at keeping your retirement plans on track too.

Shoot for the moon — even if you miss, you’ll end up among the stars

These five steps can potentially get you from $0 to $2 million over the course of your career, even if your salary stays around the $80,000 mark, adjusted for inflation, throughout the rest of your career. The beauty of it, though, is that even if you wind up a bit short, you’ll still be far better off than had you never invested at all.

If you think seriously about how much money you’ll really need to retire, one thing you’ll recognize is that once your basic needs are covered, the rest is more a matter of preference than necessity. If you wind up anywhere near the neighborhood of a multimillionaire, you’ll likely be able to cover your core expenses.

So get started now, and boost your chances of reaching a prosperous retirement. With enough time on your side and a decent plan, you just might get there, even on an $80,000 per year salary.

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Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.