Want to Retire on $100,000 a Year? Here Are 5 Steps to Get There

One of the most important parts of retirement planning is determining how much yearly income you'll need. The rule of thumb is to aim for 80% of your annual income, but this can vary depending on how much you expect to spend.

If you're a high earner, or you want to err on the side of caution, retiring on $100,000 a year is a good goal. As you'd expect, it requires a sizable nest egg to sustain that kind of income. Here's a step-by-step guide on how to get there, plus some helpful advice from Daniella Flores, founder of the financial literacy site and community I Like To Dabble.

1. Figure out how much you need to save

The first step is setting a savings target to reach by the time you retire. This amount will need to be enough that you can withdraw $100,000 per year without running out of money.

While there are many calculations to estimate how much you need, a popular and simple option is the 4% rule. The idea behind it is that you can withdraw up to 4% of your money per year in retirement without running out, assuming you have that money in stocks and bonds. That's because the returns on your investments will balance out the money you withdraw, at least historically speaking.

To determine how much money you need based on the 4% rule, multiply your desired yearly income by 25. Multiplying $100,000 by 25 gives us a total of $2.5 million.

However, if you receive Social Security benefits, that changes the math. The average Social Security retirement check was about $1,782 per month ($21,384 per year) as of February 2023, according to the Center on Budget and Policy Priorities. The maximum is $4,555 per month ($54,660 per year).

If you qualify for a $2,500 per month Social Security check, that's $30,000 per year. You'd then only need enough saved to sustain withdrawals of $70,000 per year. Using the 4% rule, that brings your savings goal down to $1.75 million.

Want an idea of how much Social Security you'll receive? The Social Security Administration has a tool you can use to get an estimate of your benefit amount on its Plan for Retirement page.

2. Invest at least 10% of your income

Investing regularly is the key to building your retirement savings, because it allows your money to grow. It's easiest to demonstrate this with an example. Let's say you earn $120,000 per year and are able to save 10% of that. If you don't earn any sort of return on that money, then after a 40-year career, you'll end up with $480,000.

Now let's say you invest that money in a total stock market or S&P 500 index fund, and it averages 8% per year. That's a reasonable return. Historically, the S&P 500, an index tracking 500 of the largest publicly traded companies on U.S. stock exchanges, has had an average annual return of about 10%.

After 40 years of investing, you'll have $3,357,372. Investing your money made you nearly $2.9 million in compound interest.

Investing is much more effective the longer you do it. If you follow the same approach as above, but you invest for 20 years instead of 40, you'd end up with $593,075. So, if you're getting started later in your career and have less time to invest, you'll need to contribute more money to reach your goals. That could mean increasing your income, investing 20% or more of your income, or both of the above.

3. Use tax-advantaged retirement accounts

There are several types of retirement accounts that provide tax benefits over a standard brokerage account. They have yearly contribution limits, so it makes sense to prioritize investing through them first until you reach those limits. Here are the most well-known retirement account options:

• 401(k): A 401(k) is a retirement account offered through an employer. You can set up contributions to come directly from your paycheck, and these are tax-deductible the year you make them. The 401(k) contribution limit in 2023 is $22,500 if you're under age 50 and $30,000 if you're 50 or older.
• Individual retirement account (IRA): An IRA is an account that you open for yourself with a broker. Contributions are tax-deductible in the year you make them. The IRA contribution limit in 2023 is $6,500 if you're under 50 and $7,500 if you're 50 or older.
• Roth 401(k) and Roth IRA: Roth plans are variations on traditional 401(k)s and IRAs. Contributions to Roth plans aren't tax-deductible in the year you make them, but withdrawals in retirement aren't taxed.

So, if you're 30 years old in 2023, you could contribute up to $22,500 to a 401(k) or a Roth 401(k). You could also contribute up to $6,500 to an IRA or a Roth IRA. Or, you can split contributions between traditional and Roth plans. For example, you could contribute $3,250 to a traditional IRA and $3,250 to a Roth IRA. 

What if you're able to max out those accounts, and you want to continue to invest? Flores notes, "With a side hustle, you would also have access to a SEP IRA and Solo 401(k). People who are only W-2 employees don't have access to these."

She also recommends looking into brokerage accounts. They don't offer the tax savings of retirement accounts, but you can withdraw from them at any time. Retirement accounts have early withdrawal penalties, normally if you make withdrawals before age 59 1/2.

4. Increase your earnings every year

Even with Social Security, you need to save quite a bit of money to retire on $100,000 a year. You're much more likely to manage it if you earn a high income, which is why you should try to increase your earnings every year. There are several ways to do this, so let's look at a few of the best options.

Get into the habit of looking for new job opportunities. Although you can and should work toward raises and promotions, changing jobs tends to be how people make the biggest salary gains. In 2022, the average wage growth for workers who changed jobs was 7.5%, compared to 5.5% for workers who stayed at the same jobs, according to the Federal Reserve Bank of Atlanta.

Another good strategy is to find new sources of income for yourself. Flores recommends side hustles, which she says "can be a way to help increase your income without jeopardizing your current job." Here are a few side hustle ideas that she suggests:

• Pet sitting
• Delivery driving
• Freelancing
• Consulting

There are also side hustles you can build to generate semi-passive or passive income. These are a great way to help reach your retirement income goals, too. If you're able to make $2,000 per month in passive income, that's $24,000 per year. Combined with Social Security, that means you won't need as much saved in your retirement accounts to have a total income of $100,000 per year. Here are a few side hustles Flores recommends for making passive income:

• Creating and selling digital products
• Building an online platform and getting paid from ads and affiliates
• Investing in property to rent out on Airbnb, camping apps, and event space rental apps like Peerspace

5. Follow a spending plan

Your income plays a big part in how much you can save for retirement, but so do your spending habits. Making a lot of money isn't enough. A whopping 50.8% of Americans who earn six figures are living paycheck to paycheck, according to a report by PYMNTS and Lending Club.

To manage your expenses, set up a monthly spending plan. This doesn't need to be complicated. A simple, effective option is to assign portions of your income to regular monthly bills, investing and savings, and fun money. For example, you could aim to use 60% of your income for bills, 20% for investing and savings, and 20% for fun money. Budgeting apps are a good way to monitor your spending and stick to your plan.

That's just one option, and you can adjust the numbers or the budgeting method so it works for your finances. What matters is that you have a spending plan with a portion of your income committed for your financial goals.

It's not easy to retire on $100,000 a year, and whether it's doable will depend on your financial situation. If you have an above-average income and you invest regularly, you have a good chance of success. Even if $100,000 a year is out of reach, the steps above will help you save more for retirement and have you as prepared as possible once you get there.