Roth ira retirement investing

Are You Saving Enough in Your IRA?


by

19 June,2013

One of the most important things you can do for your financial future is to set money aside for retirement. Your retirement fund can provide you with peace of mind and financial stability in your later years. It’s easy to forget about the future when you’re worried about the present. But you really need to look ahead to what’s coming if you don’t want find yourself struggling during retirement.

You want to make sure that you are saving enough money in your IRA so that you are ready for what’s next — and so that you have a better chance of outliving your assets.

You Probably Aren’t Saving Enough

The truth is that you probably aren’t saving enough for retirement. While it’s true that you should put aside anything you can when you first get started with saving, it’s important to remember to increase what you are setting aside as you have the means. While you might only be able to set aside $100 a month at the outset of your career, over time you should remember to increase the amount you save.

We hear a lot about the power of compound interest, and it’s true that investing over time can help you build wealth for a comfortable retirement. However, while compound interest can be very helpful to your finances and in building wealth, it’s not a cure-all. You need to have assets earning interest in order to build that wealth. And that means you probably aren’t saving enough money right now.

Even if you started investing in your IRA when you were a teenager, that $100 a month just isn’t going to cut it. Let’s say you invest $100 a month, without fail, into an IRA that returns, annually, 6%, compounded each year. If you start when you are 15 and let the money grow for 50 years (until you are 65), you will end up with a little more than $370,000. Now, if you didn’t start investing until you were 35, and you invested for 30 years (until age 65), you will end up with just over $100,000. That’s not even close to enough to live comfortably.

What you’re saving each month probably just isn’t enough. In sheer numbers, it’s not doing it for your financial future. So, while some investment in your IRA is better than none, you need to make sure to step up your game as you begin earning more money. Once you can, increase your investment. Work up to doubling your $100 per month to $200, and then boosting it to $300 or $400. Starting early gives you a good foundation, and then adding more money to your account as you become able is what will bring you to the final point.

An IRA Can Supplement Your 401(k)

One thing to think about is that you can increase your retirement savings when you open an IRA in addition to your company’s 401(k). You might not have access to the options you want with your employer’s plan, or there might be high fees. With an IRA, you can direct more of your investments. Being able to combine different strategies can help you boost your chances for a better financial future during retirement. Carefully think about what makes the most sense for you, and consider getting help from a retirement planning expert who can lay out your options for you.

Max Out Your IRA

It can make sense to make a decision to max out your IRA. Each year, the IRS reviews the rate of inflation, and makes an adjustment to how much you can contribute each year to a Traditional IRA or a Roth IRA. When possible, it makes sense to work up to the max. Currently, the maximum is $5,500 a year, or right around $458 a month. Let’s say you max out your IRA for 20 years. That’s $214,460 at the end of the 20 years. It’s still not enough to retire on, but if you add that to the fact that you have been contributing a lesser amount previously, then you’ll have a little bit more to go on.

Of course, you have even better results the longer you invest. If you start investing in an IRA at age 25, and you max out your contributions immediately, in the 40 years until you turn 65, the money can grow to $902,262. That’s more like it!

And, of course, your potential earnings might be higher if your annualized returns beat 6%, and if you are able to invest more money as the contribution limit for the IRA increases over time. It’s better to estimate more conservative earnings and plan based on that so that you have a good chance of earning what you need over time. If you estimate high returns, you will end up with a false sense of security.

Another consideration is that your IRA offers you the chance for more efficient earnings because of the tax advantages. A Traditional IRA offers you a tax deduction today, and you pay taxes later, when you withdraw the money. Another possibility is the Roth IRA. The Roth version grows tax-free. This means that you pay taxes on your money before you contribute to the account. However, you don’t have to pay taxes when you withdraw the money. Either way, your money grows with tax advantages, and that means you get a little bit of an edge.

Think about how much you are putting into your IRA. Are you maxing it out? You want to be able to maximize your IRA contributions. It’ll be better for your financial future if you do.