Making 100k a year from investments is a goal for many soon to be retirees who are dreading the loss of a salary. 
How much do you need to invest to make $100k a year? It depends on how much return you’re earning from your investments. Here’s the formula to estimate how much you need to invest to make $100k a year for your investments: Amount You Want to Make/Percentage Return = How Much You Need to Invest
In this post I’ll address:
- How much you need to invest to make $100k a year from total returns
- How much you need to invest to make $100k a year from dividends
- The challenges in consistently making 100k a year from investments
- 3 tips for helping estimate how much you need to earn $100,000 a year from investments
Let’s get started.
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Average Annual Returns
It can be hard to know how much you need to invest to make $100,000 a year consistently. That’s because stock investment returns are inconsistent from year to year.
There’s also the fact that you can’t know for sure what the market trend will be for any given time frame. Returns can be much higher during bull market periods and much lower during bear market periods. Both bull and bear markets are facts of life for stock market investors, however.
Even though bear markets are much rarer than bull markets, they can be devastating to a retirement plan based on investment income so they’re always worthy of consideration.
Investors must consider both of these challenges when estimating how much they’ll need to invest to make $100,000 a year from investing alone.
The only way to attempt to estimate how much you need to invest to make 100K a year is by using historical average returns, however. Using past return data to estimate how much you need to invest to make a given sum, such as 100k, is an imperfect but acceptable method because that’s the best we’ve got.
Let’s look at 3 examples of how much you need to invest to make $100,000 a year, having clarified these crucial points that many investors overlook in retirement planning, especially following years of stock market gains when the future seems both predictable and rosy.
Note that in this article I am considering an investor that has 100% of their portfolio in stocks since stocks are the most popular investment.
The starting point
All investors must first decide if they want their desired return, in this case $100k a year, to come from total returns or from dividend income.
As a refresher, total returns consist of:
- Capital gains
- Dividends
- Compounding of both gains and dividends
Let’s look at an example of both total returns and dividends in evaluating how much you need to invest to make $100k annually so you can see what might work for your own situation.
Making $100,000 a year from total return
Remember that capital gains, an important part of total returns, occur when you sell an asset for more than you paid for it.
Let’s look at past returns to estimate how much you need to invest to make $100k a year based on historical average total returns, then.
The easiest way to do this is by using past returns of an index.
The S&P 500 represents the stocks of 500 large companies in the United States, so we’ll use its return in this example.
The average annual return of the S&P 500 since it began representing 500 stocks in 1957 is 10.15% through 2022. (1.)
The formula above reveals that dividing $100,000 by 10.15% and assuming the results of $985,222 is how much is needed to make $100k a year from investments.
Many new investors assume this result is set in stone. Advanced investors already know that the returns accomplished from capital gains, in particular, can vary greatly from year to year.
For example, in 2008 the U.S. stock market was down just over 38%; in 1954 stocks were up over 54%! (2.)
Up and down years are often followed by moves in the same direction in surrounding years, increasing the fluctuations in portfolio earnings even more.
I include this extreme return data to reiterate the point that the amount needed to make $100k will vary from year to year because it’s based on returns which always vary from year to year.
Almost a million dollars, or $985,222 can be used for a rough estimate of how much is needed to invest to make 100K a year for an investor willing to accept that:
- Returns will vary from year to year
- This is simply average investment returns based on long term average stock market returns
Here’s another very important point:
The 10.15% average return is based on compounded returns. In other words, both the capital gains and the dividends were reinvested as they were received thereby allowing them to compound.
A retiree or someone looking to live on $100,000 a year from investments would not be reinvesting capital gains or dividends; they would be making withdrawals from retirement savings to live. These withdrawals would significantly lower the investment return.
Next, let’s see how much you need to invest to make 100k a year from dividends.
Making $100,000 a year from dividends
The good news is that dividends are a little less tricky to predict than total returns. That’s because capital gains are a factor of the broad market more than dividends are.
The broad market is influenced by macroeconomic factors.
While dividend rates are certainly influenced by prevailing interest rates, individual companies can control their dividend rate, so dividends tend to be more consistent.
The dividend yield of the S&P 500 index is about 1.56% as of this writing, which is close to the long term average dividend yield of about 1.77%.
You can divide $100,000 by 1.56% to see that you would need to invest $6,410,256 to make 100K a year on dividends invested in the S&P 500!
Similarly, if an investor had a portfolio of individual stocks averaging a 5% dividend yield, he would need 2 million dollars invested in that portfolio.
You can see what a difference the effort to invest in higher yielding stocks makes.
How Much You Need to Invest to Make 100k a Year
| Based On | Return or Yield | Amount Needed to Invest for 100k |
|---|---|---|
| Total Return | 10.15% | $985,222 |
| S&P 500 Index Dividend | 1.56% | $6,410,256 |
| High Dividend Stocks | 5% | $2,000,000 |
Factors to Consider
I generally avoid cookie cutter rules when it comes to my writing about investing. There are always other factors to consider, so let’s look at a few that will affect how much money you need to invest to make $100k a year or any other amount you need to live.
Living off Dividends
Keep in mind that an investor who is spending only dividend income is leaving investment capital from gains intact to grow and compound.
Making Withdrawals from Savings
Investors may choose to make retirement account withdrawals., such as 100k in this example, in some years and not make withdrawals in other years, depending on total returns. This can be an ideal situation for retirees fortunate enough to have other income sources.
Diversified Portfolios
Most investors have at least some of their retirement savings invested in defensive assets, such as bonds or cash. This will change the dynamics of the formula we used above to estimate how much you need to invest to make 100K a year since the returns of these assets are different from the returns from stocks used in the formula.
Income from Investments
Note that some more advanced investors sell covered calls on stocks they own to increase income, particularly given the low yield dividends provide.
An investor will need to invest considerably less money when selling covered calls to make 100k since the income generated is much higher than only dividend income or even total return in most years.
Covered calls aren’t without problems, however. One main disadvantage is that some covered call strategies eat into capital gains potential.
Summary
In a perfect world, investment returns would be consistent from year to year, making it easy to live off investments. This is simply not the case, however.
Historical average annual returns can be used as a very general guide for investors who accept that predicting how much you need to invest to make 100K a year is subject to wide fluctuations.
(1.) https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
(2.) https://www.macrotrends.net/2526/sp-500-historical-annual-returns
