Want to retire with $100,000 a year? Here are 5 steps to get there

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

If you make a lot of money or 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 support 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 site and financial literacy community I like to dabble.

1. Find out how much you need to save

The first step is to set a savings goal to achieve before retirement. This amount will have to be enough to be able to withdraw $100,000 a 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 a year in retirement without running out of it, assuming you have that money in stocks and bonds. This is because the returns on your investments will compensate for the money you withdraw, at least historically speaking.

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

However, if you receive Social security benefits, which changes the math. The average Social Security retirement check was about $1,782 a month ($21,384 annually) 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 a month Social Security check, that’s $30,000 a year. Then you’d only need enough savings to support withdrawals of $70,000 a year. Using the 4% rule, that brings your savings goal to $1.75 million.

Want an idea of ​​how much you’ll get in Social Security? The Social Security Administration has a tool you can use to get an estimate of your benefit amount Retirement plan page.

2. Invest at least 10% of your income

Investing regularly is key to building your retirement savings, because it allows your money to grow. It’s easier to demonstrate this with an example. Let’s say you make $120,000 a year and are able to save 10%. If you don’t earn any kind of return on that money, 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 is on average 8% per year. This is a reasonable return. Historically, the S&P 500, an index that tracks 500 of the largest publicly traded companies on US stock exchanges, has had a average annual yield by about 10%.

After 40 years of investing, you will have $3,357,372. Investing your own money earned you nearly $2.9 million in compound interest.

Investing is much more effective the more you do it. If you take the same approach as above, but invest for 20 years instead of 40, you’ll end up with $593,075. So if you start later in your career and have less time to invest, you’ll need to contribute more money to achieve your goals. This could mean increasing your income, investing 20% ​​or more of your income, or both.

3. Use tax-advantaged retirement accounts

There are several types of retirement accounts that offer tax advantages over a standard brokerage account. They have annual contribution limits, so it makes sense to prioritize investments through them before hitting those limits. Here are the most popular retirement account options:

• 401(c): 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 are under 50 and $30,000 if you are 50 or older.
• Individual Retirement Account (IRA): An IRA is an account you open for yourself with a broker. Contributions are tax deductible in the year in which you pay them. The IRA contribution limit in 2023 is $6,500 if you are under 50 and $7,500 if you are 50 or older.
• Roth 401(k) and Roth IRA: Roth plans are variations of traditional 401(k)s and IRAs. Contributions to Roth plans they’re not tax deductible in the year you make them, but withdrawals in retirement aren’t taxed.

So if you’re 30 in 2023, you could contribute up to $22,500 to a 401(k) or Roth 401(k). You could also contribute up to $6,500 to an IRA or 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 can max out these accounts and want to keep investing? Flores notes, “With a side hustle, you’d also have access to SEP IRAs and Solo 401(k). People who are W-2 employees only don’t have access to these.”

Also recommends looking into brokerage accounts. They don’t offer the tax savings of retirement accounts, but you can withdraw them at any time. Retirement accounts have early withdrawal penalties, usually if you withdraw before the age of 59½.

4. Increase your earnings every year

Even with Social Security, you have to save up a lot 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 look to increase your earnings each year. There are several ways to do this, so let’s look at some of the best options.

Get into the habit of looking for new job opportunities. While you can and should work for raises and promotions, changing jobs tends to be how people get the biggest paychecks. In 2022, the average wage growth for workers who switched jobs was 7.5%, compared to 5.5% for workers who kept the same job, according to the Federal Reserve Bank of Atlanta.

Another good strategy is to find new sources of income for yourself. Flores recommends side businesses, which she says “can be a way to increase your income without jeopardizing your current job.” Here are some ideas for the side hustle she suggests:

• Pet sitter
• Delivery guide
• Freelance
• Advice

There are also side businesses that you can build to generate semi-passive or passive income. These are also a great way to help you meet your retirement income goals. If you’re able to earn $2,000 a month in passive income, that’s $24,000 a year. Combined with Social Security, this means you won’t need as much saved in your retirement accounts to have a total income of $100,000 a year. Here are some side tricks Flores recommends for passive income:

• Creation and sale of digital products
• Build an online platform and get paid from advertisers and affiliates
• Invest in Airbnb rental properties, 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 does your spending habits. Making lots of money is not enough. A whopping 50.8% of Americans making six figures they live paycheck to paycheckaccording to a report by PYMNTS and the Lending Club.

To manage your expenses, set up a monthly spending plan. This doesn’t have to be complicated. A simple and effective option is to allocate parts of your income to regular monthly bills, investments and savings, and fun money. For example, you might aim to use 60% of your income for bills, 20% for investments and savings, and 20% for fun money. Budget apps they’re a good way to track your spending and stick to your plan.

This is only one option, and you can change the numbers or budget method to make it work your finances. What matters is that you have a spending plan with a portion of your income committed to your financial goals.

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