So, let’s get into the bougie part of the show and talk about people making $200,000 and $400,000 in income. First up, $200,000 income. Once you reach that milestone, you’re rocking and rolling. But let’s be realistic, not many people can start off with $200,000. We assume a slight annual increase of 1.5 percent. Now, let’s see how it plays out over a 25-year working period.
During these 25 years, your portfolio will earn 8 percent and then transition to 5.5 percent at financial independence. We’ll examine different savings rates to determine how much pre-retirement income you can replace. Here’s what we found, at a 25 percent savings rate, someone earning $200,000 a year can replace 41 percent of their pre-retirement income. Saving 30 percent allows you to replace 49 percent of your pre-retirement income. Now it gets exciting. If you can maintain the discipline to save 35 percent of your gross income every year at $200,000 a year, you could likely replace 58 percent of your pre-retirement income and if you can achieve a 40 percent savings rate, we finally cross the magic threshold of 60 percent. You can replace 66 percent of your pre-retirement income.
Assuming a 1.5 percent annual wage increase over the $200,000 income, it’s gratifying to see that you have enough retirement income to sustain your lifestyle if you save 35 to 40 percent. However, it’s important to note that even with a high income, your lifestyle won’t reflect it because of the discipline required for saving and investing.
You have to make a choice: a higher standard of living pre-retirement or a higher standard of living post-retirement. It’s like squeezing a balloon. You may have a lower savings rate during your working years, but when you reach retirement, you may need to adjust your lifestyle due to the level of income you need to replace. There’s nothing inherently bad about it, but it’s a decision you need to make in advance.
Conversely, if you can live off saving 40 percent of your gross income throughout your working years, you may be able to enjoy the things you’ve dreamed of in retirement. You can travel, see the world, have experiences, and perhaps afford nicer things because you made sacrifices during your working years.
Lastly, be careful. If you’re making a high income and leave the workforce, it’s not easy to replace a $200,000 income. Make sure you’re disciplined in how you spend your money. While you may have enough on paper, if you enter a lifestyle where you spend significantly more than you did during your working years, you may miss out on a lot even with a high income.
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