$75,000 Perfect Salary = $1.4m Perfect Savings
How much do you need to save to achieve the perfect salary in retirement?
A popular study by Princeton University in 2010 showed that the perfect salary for happiness was: $75,000. Americans earning above $75,000 continued to show an increase in life satisfaction. For example, Americans earning $160,000 a year reported more overall satisfaction than people earning $120,000, and so on.
So the crowning $75,000 as the “perfect salary” is misleading. A better assessment of the study might be that $75,000 is the threshold income for happiness because it is likely the income where Americans can cover their basic needs, like food and housing, to feel secure about their financial future.
Translating perfect income to perfect savings
Assuming $75,000 is the income retirees also need to maintain a threshold of financial security, how much do they need saved in their retirement accounts?
Before jumping into calculations, we first need to adjust the $75,000 for inflation. The study was done in 2010, and $75,000 adjusted for inflation is closer to $93,000 in today’s 2021 dollars. (assuming an average 2% inflation since 2010).
Next, we need a couple of assumptions regarding retirement age, and life expectancy. The average age Americans retire is 62. The average life expectancy is 79 for Americans according to the World Bank, but we are going to be optimistic and estimate that you live until 90 years old.
An average American, retiring at age 62 and living until 90, would need $1,469,649 saved for retirement in order to withdraw $93,000 every year accounting for inflation (average inflation 3%, average investment return 8%).
In order to have this much saved, using the same inflation and investment return assumptions, assuming you start with zero savings:
A 20 year old needs to save $15,760 per year
A 30 year old needs to save $26,583 per year
A 40 year old needs to save $47,871 per year
Adjusting for higher cost of living
I am well aware that most of us don’t live in an average city. I live in San Francisco where $100,000 qualifies you for low income housing. In order to adjust for the higher cost of living, I searched for a major city that comes close to an average city, at least in terms of cost of living, and Atlanta comes close.
Next, I adjusted the “happy income” using Nerdwallet’s cost of living calculator. According to Nerdwallet, the cost of living in San Francisco is 93% higher than Atlanta. In other words, the “happy income” in San Francisco is $180,000.
In order to have enough saved to spend $180,000 per year in retirement, using the same inflation and investment return assumptions, and assuming you start with zero savings:
A 20 year old needs to save $30,503 per year
A 30 year old needs to save $51,451 per year
A 40 year old needs to save $92,654 per year
Given the high cost of living in San Francisco and other large cities, employers are adding special features to their 401(k) plans that allow many high earners to save north of $58,000 in their 401(k) accounts every year. To learn more about this strategy, check on my post here.
The original Princeton study and my methodology for translating the perfect income to perfect savings is far from… perfect. But assuming that there is some validity to the study, it shows saving for retirement can directly impact your happiness in the future.
Everyone’s financial situation is different, and two people making the same $93,000 can have drastically different circumstances. If you are a high earner making $500k+ and would like to learn more about how I can help you put together a personalized retirement savings plan, schedule a 15-minute call with me below.
