Is Retiring on $100,000 a Year Doable? What It Takes to Get Employees There

One hundred grand isn’t as much as it used to be, but it is still a six figure income. Employees are encouraged to save for their own retirement. The firm does its part through the 401(k) match. Is it possible for an employee today to be in a position to have $100,000 in annual income in retirement?

The role of Social Security

Although employees are tasked with providing for their own retirement, they get a lot of help, thanks to Social Security. Let us assume an employee retires at full retirement age. That is age 66, if you were born between 1943-1954. It gradually rises to 67 if you were born after 1960.

What benefit can you collect if you retire at full retirement age? In 2023, the maximum benefit is $3,627. To get the maximum, you need to hit several thresholds including working for 35 years and make at least the maximum wage taxable, which is $160,200 for 2023.

However, if both the employee and their spouse are the same age and earning similar high incomes, they should be collecting $3,627 x2 or $7,254/month. This amount can be higher if they waited until age 70, but let us assume they do not. Although inflation is a persistent problem, fortunately, Social Security has a Cost of Living Adjustment (COLA) that gradually increases payments over time.

Under ideal circumstances, they could be collecting $87,048 a year. We are getting close to $100,000.

The role of your 401(k)

The retirement plan at work is meant to serve as a personal pension. You set money aside for years, let it grow and then decide how you will access it upon retirement. Your employees have plenty of choice concerning how their retirement savings could be invested. If they invested in stocks and bonds (through funds) a generally  In theory, this means the retiree is having their cake and eating it too. They are collecting income, while leaving sufficient assets behind to grow, protecting them against inflation. This would mean the retiring couple would need $325,000 in combined retirement assets.

Suppose the employee did not like the stock market and wanted to earn interest, knowing their principal would be returned at a specific time. According to CNBC, as of 8/30/23, 20-year US Treasury Bonds are yielding 5.244%. The retiring couple would need $248,000 to meet the $13,000 annual shortfall.

This second solution does not solve the inflation problem. Prices will increase over 20 years. Their $13,000 annual payment will not.

Another possible strategy is to use money within your 401(k) to buy an annuity. This has pros and cons. The two major benefits are your payments will last your lifetime and the cash flow would be higher than a bond would deliver, because your annual payments represent a blend of principal and interest. A major disadvantage is the tax benefits of receiving both principal and interest are negated because everything coming out of the 401(k) is taxable as income. In a traditional annuity, payments stay the same, although insurance companies can add riders to customize policies. As of 8/27/23, a $100,000 single life annuity might payout $6,600 a year for a 65-year-old. If they needed to add $13,000 in annual income, about $197,000 should be about right.

Life is not a bed of roses

In reality, not everyone collects the maximum Social Security benefit. The average Social Security benefit (as of February 2023) was $1,782. According to nerdwallet, the average 401(k) balance for Americans age 65+ is $232,710 and the median balance is $70,620. The calculation you and your retiring employee are considering is how much a full-time employee, probably with many years of service, will collect from Social Security now or in the near future. Another factor is Medicare deduction from Social Security. It is currently $164.90/month.

This is a topic your employees should be planning for in advance, not waiting until the last minute. This is a financial wellness topic with a very attractive end goal. The title and the idea of retiring on $100,000 a year should get your employee’s attention. This can be a good lead-in to financial wellness education provided by your company or a third party provider. Two of the “building blocks” mentioned in the article are Social Security and their 401(k). You might offer two training sessions going into deeper detail. One might be “Understanding Social Security Benefits.”  Another might be “Understanding Your 401(k) and the Benefits of Compounded Growth.”  The key takeaway: The earlier they start putting money aside for retirement, the greater the probability of achieving their goal.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.