July 17, 2024

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One Day, Your Roth IRA Gains Will Equal the Annual Contribution

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The investments held in a Roth individual retirement account (Roth IRA) determine the return, not the interest rate. One day, those returns will exceed the annual contributions, thanks to the power of compounding.

When you save for retirement in your Roth account, it’s important that you work toward a specific investment goal rather than just maximizing your yearly contributions to minimize your tax bill. When you save and invest, you should have a target in mind and a portfolio designed to ensure your future financial health. Until you establish such a goal, there is no objective way to know if you are saving enough.

If you have not yet determined an investment goal, here is a formula for estimating how much you’ll need in your nest egg to fund the retirement lifestyle that you want.

Key Takeaways

  • A Roth individual retirement account (Roth IRA) is a tax-advantaged way to save for retirement.
  • Your earnings will exceed your annual contributions because of the magic of compounding.
  • When you save through a Roth IRA, make sure that you work toward a specific investment goal rather than maximizing your annual contributions.
  • Most experts suggest using 80% of your current income as a guide to help you plan your retirement savings.
  • Factor into your plans your current age, the age when you plan to retire, and your life expectancy after you leave the workforce.

Step 1: Estimate the Income That You’ll Need in Retirement

This step is tricky because you are estimating expense levels for a life you are not yet living. Many financial planners recommend using 80% of your current income as a yardstick to make it simple for you.

We’ll use a hypothetical figure and time frame for this article. In this case, let’s assume an income of $10,000 per month, which at 80% is $8,000, or $96,000 per year.

Step 2: Subtract Social Security and Pension Benefits

You can find this information in your Social Security Earnings Record (viewable on the…

2023-12-02 03:04:44

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