Retiring as a millionaire gives you more options for your senior years. It could mean getting to do what you have always wanted and enjoying a comfortable lifestyle without stress.
But reaching retirement age with $1 million or more in a Roth IRA isn't something that usually happens by accident. It takes strategic planning to get to that place. And if retiring with a million-dollar Roth IRA is a goal of yours, you should know that these are some of the steps that savers commonly take to get there.
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1. They start saving from a young age
When it comes to growing retirement wealth, time is a powerful tool you can use to your advantage. The more time you give your money to grow, the larger a Roth IRA balance you're likely to end up with.
Not everyone is motivated to save for retirement at the very start of their careers. But if you push yourself to start funding a Roth IRA from as early an age as possible, you could find that you can reach $1 million or more in savings by retirement pretty seamlessly.
Let's say you invest $350 a month in a Roth IRA between ages 27 and 67 (which is full retirement age for Social Security if you were born in 1960 or later). If your portfolio generates an average annual 8% return, which is a bit below the stock market's average , you're looking at almost $1.1 million. But if you wait even five years to start investing that $350 a month, your balance at age 67 creeps downward to about $724,000.
Of course, $724,000 is a decent amount in its own right. But if you're looking to retire with more, then it's important to push yourself to start saving from the beginning of your career.
2. They invest their money in stocks for supercharged growth
Playing it safe in your Roth IRA isn't going to do your nest egg a lot of good. Although stocks carry inherent risk, if you steer clear of them in your retirement portfolio, you take on another risk: not meeting your savings goals.
We just saw that investing $350 a month over 40 years could lead to almost $1.1 million in savings at an 8% average yearly return. If you scale back on stocks and maintain a more even mix of stocks and bonds, you might end up with a 6% return in your portfolio instead. That puts your balance at age 67 at $650,000 instead of $1.1 million.
3, They take advantage of Roth conversions for the future tax benefits
Roth IRAs offer the benefits of tax-free investment gains and withdrawals. They also don't impose required minimum distributions , giving you the freedom to manage your savings as you see fit.
It's often the case (though not always) that people who are in a position to contribute nicely to a Roth IRA earn too much money to fund these accounts directly. For the current year, Roth IRA contributions are barred for taxpayers filing as individuals who earn more than $161,000 or married couples filing jointly earning more than $240,000.
However, it's possible to contribute to a traditional IRA and convert it to a Roth as you go. While your tax burden does increase at the time of your conversion, you then get to enjoy tax-free gains in the years that follow.
Retiring with a million-dollar Roth IRA is possible if you work toward that goal strategically. Use these tips to follow in the footsteps of those who are kicking off retirement with a seven-figure nest egg.
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