How to Retire With $1.2 Million on a $58,000 Salary

The median annual salary in the US is $58,260, according to the Bureau of Labor Statistics. While this number has steadily increased over the past few years, depending on where you live in the country, this number may seem pretty low.

Can you really retire comfortably as an average earner? The answer is a resounding yes. Here’s how:

Calculate how much you need

Retirement experts advise you to spend about 80% of your current salary on retirement. If you’re an average earner, that equates to annual retirement income of $46,608.

To calculate the total savings you need to do this, you can use the handy 4% rule, where you divide your retirement income by 4%: $46,608 ÷ 0.04 = $1,165,200.

In theory, with an average salary of $58,260, you’ll need about $1.2 million in savings over your career to retire comfortably. If you save 15% of your salary each year (the minimum recommended by financial advisors) and work for 45 years, you’ll have saved an impressive $393,255. Unfortunately, that’s nowhere near the $1.2 million needed for retirement. But don’t worry – there is a simple solution.

Don’t leave your money in the bank

With interest rates on savings accounts near zero, the key to making the $1.2 million in retirement savings calculated above is not leaving your savings in the bank where your money won’t grow.

Instead, you should invest your capital in the stock market where the S&P500 has averaged about 10% returns (dividends reinvested) for the last 70 years or more.

While there are a number of retirement planning strategies you could employ, let’s assume for the sake of argument that you simply invested 15% of your salary in a low-cost S&P 500 index fund like this Vanguard 500 index fund ETFthroughout your 45-year career.

You would only need a modest 4.5% return to turn the $393,255 in savings into $1.2 million. Considering the market has delivered significantly higher returns, chances are you have a lot more than that.

Author’s calculations via Investor.gov.

The table above shows the power of investing. The stock market gives even low-income earners the opportunity to retire as multi-millionaires.

Additional ways to top up your retirement savings

Now that you understand that investing is key to a successful and comfortable retirement, consider some additional strategies you can use to improve your retirement prospects.

Avoid lifestyle inflation

Lifestyle inflation is when you increase your spending at the same time as wage increases. While it’s okay to spend a little more when you start earning more, ideally you want to increase your savings as your wages increase.

The easiest way to do this is to just live the same lifestyle, even if you earn more. This can save you well over 15% and dramatically increase your chances of reaching your retirement goals.

Invest in yourself

at Berkshire Hathaway‘s 2022 AGM, Chairman and CEO Warren Buffet offered some rather unique investment advice: “By far the best investment is anything that develops on its own.”

Learning new skills, whether by going back to school or simply learning for free on the internet or in books, will ultimately make you more marketable to organizations and in turn increase your earning potential.

In 2022 there is very little you cannot learn as long as you have the motivation and an internet connection. If you’re worried about your retirement, consider adding new skills to your professional repertoire so you can increase your income.

Finding even small ways to spend less and earn more can make a big contribution to your overall retirement savings. When you combine this with the incredible wealth-building opportunities in the stock market, even on an average salary, your chances of a successful retirement are within reach.

Mark Blank has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.