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So I have been happily socking away money in a Roth IRA for several years now, but I just did a little calculation that was disappointing. I was trying to figure out how much I would have if I put in the $5,000 every year until I retire. I'm 28 and earn $28,000. Assuming I get an ok return, it just didn't seem like that much money to justify risking it in the market. Now granted, I'm sure I will continue to allocate my roth IRA into stocks and index funds because I enjoy it, but can anyone give me a compelling reason to do so? Why not just put it in some low interest bond or something or other each year instead? I should add that I don't foresee being able to save much more outside of the roth IRA for sometime, if ever. So I'm sure it will be nice to have a $100,000 plus to retire on, but that won't really last long at all. So I'm despairing about how I'll ever be able to retire.

thanks.
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I was trying to figure out how much I would have if I put in the $5,000 every year until I retire. I'm 28 and earn $28,000. Assuming I get an ok return, it just didn't seem like that much money to justify risking it in the market.

What return do you consider 'okay'?

Because, since you said you've been putting money into your Roth for several years, I'm going to assume that you currently have $15,000 in it. Then, assuming an 8% return and $5,000 in additional funds added each year until you are 67, I get about $1.6 million in your Roth.


AJ
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Assuming you retire at 62, just saving $5,000 a year would give you $170,000 if you put it in the mattress. Invest it with an 8% return and you'll have nearly $800,000. Adjust that for inflation and it's about $400,000. Saving $5,000 now is great. If you can continue saving the same percentage of income as your income grows over your lifetime you'll be able to retire quite comfortably.
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"I don't foresee being able to save much more outside of the roth IRA for sometime, if ever. "

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

One of the things folks don't always tell you is that spending
tends to change as you get older. Incomes also tend to change.
Careers change.
Habits are more difficult to change.
You started a good habit.
Keep it up if at all possible.
But also try to get funds into an emergency account - not retirement
but emergency. Rainy day - or snowy day - funds.
Two good habits are even snazzier than one.

Howie52
I stood where you stand about 35 years ago but with less put
aside - now I can possibly retire at 57 maybe - if I had your
good habit earlier I would be less worried today.
I envy your foresight and focus.
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No. of Recommendations: 4
....So I'm despairing about how I'll ever be able to retire......

The rule of 72 is that you can divide the expected return on your investment by 72 and get the approximate time it will take your investments to double. For example if you expect to earn 7.2% then 72/7.2=10 years for an investment to double. Over the long term earning 7.2 percent above inflation is a pretty reasonable and convenient figure to use.

Using the rule of 72 and assuming a 7.2% return means if you have $15K in the Roth today, then at theses ages it will double and be;

38 $30K
48 $60K
58 $120K
68 $240K

People have done a lot of analysis trying to figure out what a "safe withdrawal rate" (SWR) in retirement is. Without going into details a pretty good argument can be made that you can start out withdrawing 4% of your nest egg each year if your retire around the normal age. If your retire with $240K, then you could withdraw a bit less than $10K each year. In addition to social security this would be getting in the ballpark of replacing your current take home pay Surprise !!!! Of course over the years you will likely get raises and promotions and you will need a larger nest egg to replace your future higher income.

In addition if you make another $5,000 Roth contribution next year, then you will be able to retirement a year or two earlier.

.... but I just did a little calculation that was disappointing....

As odd as it sounds, having a number of low return years while you are building your investments is the best thing that can happen for you because you get more stock for your money.

Greg
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As odd as it sounds, having a number of low return years while you are building your investments is the best thing that can happen for you because you get more stock for your money.

Greg


This is an incredibly important statement. I graduated college in 1968 and was REALLY disappointed with investment results. Fortunately I got through my mistakes with whole life, oil and gas partnerships, commodities and other "high yield" opportunities and just invested in equities (and with retirement funds -- low-cost mutual funds, in part because TIAA-CREF gave you few other options).

Imagine if stocks average 8% over the entire life of the market, and have just spent 10 years averaging 0%. You could be there for the next ride, which for new money I'll probably miss. Patience!

Great insight Greg and others!

Hockeypop
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One more thought. You might want to consider making at least $2,000 or so of your retirement contribution in a traditional IRA instead of the Roth so that your adjusted income will be low enough to qualify for the "Credit for Qualified Retirement Savings Contributions" that you claim on form 8880.

http://www.irs.gov/pub/irs-pdf/f8880.pdf

Since you make $28,000, the two thousand dollars traditional IRA contribution would bring you adjusted income down to $26,000 which would probably qualify you for this credit.

If you have not been taking this in prior years you may be able to do an amended return for some of the prior years to get this credit if you qualified for it then.

I'm not sure of the details of the rules, but if you have already made your Roth contribution it might still be possible tp re-charterize part of it to a traditional IRA to get this credit.

Greg
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.... Imagine if stocks average 8% over the entire life of the market, and have just spent 10 years averaging 0%. You could be there for the next ride, which for new money I'll probably miss. Patience!....

Just for clarification. In addition to the possibility of a few bad years being averaged out with some very good years over the long term, the advantage I was referring to was that when you buy a stock(or index fund) you are really buying a small piece of the company so when you are buying the lower the price the better it is for you.

For example if instead of stocks your only retirement option was gold (which would be terrible) then for the 40 years from your 20's thru your 60's, you would really want the price of gold to be as low as possible so that your $5,000 per year would buy you the most gold.

Within reason stocks behave the same. During your accumulation years you should really want the stock market to not grow too fast.

Greg
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