My goals might sound lofty, but I've run the numbers and have a strategy that puts the odds of success in my favor.
All told, I likely won't be able to pinpoint exactly how much money I'll need down to the penny for a comfortable retirement. Maybe $1 million will do the trick, or perhaps $400,000 in an individual retirement account will suffice, especially if I have other accounts to tap into. However, I do know that $87,000 -- the median retirement savings for American households -- won't cut it for me personally.
Since I probably have a good twenty to forty years before I hang up my professional hat, I'm assessing my potential income sources and expenses in retirement to get a clearer picture of my needs. To be on the safe side, I've set my sights on becoming a Roth millionaire. The best part? I won't have to worry about paying taxes on those Roth dollars in retirement because I'm taking care of the tax bill upfront. Here's my strategy.
Image source: Getty Images.
Use the Roth IRA to its full potential
When I first opened my Roth IRA back in college, I contributed money sporadically, but that was about it. I didn't have a game plan or a clear strategy for how much I would contribute, how often, or how to allocate my contributions. Needless to say, my account balance barely moved during those years.
I approach retirement planning differently now. I aim to max out my Roth IRA every year that I am eligible to contribute. For 2024, you can contribute up to $7,000 if you are under 50 and up to $8,000 if you are older. While that might not seem like much, the power of compounding can work wonders on your portfolio when you make wise investment decisions and stick it out over the long haul.
For example, if you invest your Roth IRA funds in individual stocks, exchange-traded funds, and other assets you've researched, and achieve a return of around 8% to 10% -- which aligns with historical stock market averages -- you could potentially accumulate a million dollars in your Roth IRA alone within three to four decades. Take a look at how your account could potentially grow if you invested $7,000 annually. Keep in mind that investment returns aren't guaranteed, so it's important to assess your risk tolerance before investing.
$7,000 Invested Annually For: | Growing at 8% | Growing at 10% | Growing at 12% |
|---|---|---|---|
10 years | $109,518 | $122,718 | $137,582 |
20 years | $345,960 | $441,017 | 564,891 |
30 years | $856,421 | $1,266,604 | $1,892,048 |
40 years | $1,958,467 | $3,407,963 | $6,013,997 |
Data source: Author calculations.
Contribute to other retirement accounts
I'm not always able to make direct contributions to a Roth IRA because my income sometimes exceeds the threshold. If you're in the same boat, you can contribute to a traditional IRA and later do a Roth conversion. Just be sure to understand the ins and outs of how it works before pulling the trigger.
Besides that, you can boost your chances of hitting your million-dollar retirement goal by contributing to other Roth accounts. A Roth 401(k), for example, is an employer-sponsored retirement account that can help supercharge your retirement savings. Roth 401(k) contribution limits are higher than IRAs -- $23,000 in 2024 for those under 50 -- and your employer might even offer a match to help you increase your savings. Plus, a Roth 401(k) doesn't come with income limits, so you can contribute to this account even if you're ineligible to make direct contributions to a Roth IRA.
By setting money aside in another Roth account, you're not relying solely on your Roth IRA to do all the heavy lifting in getting you to that million-dollar mark.
Make it easy for you to become a Roth millionaire
Let's face it -- the odds of becoming a Roth millionaire are slim if you're struggling to keep up with your monthly bills. To get on the right track, here are a few financial moves you should have under your belt:
- Build an emergency fund
- Pay down debt
- Live below your means
- Regularly save money for upskilling opportunities and short-term goals
- Increase your income
- Automate your savings and investments
Becoming a Roth millionaire is a long game, and I'm ready to be patient and consistent over the next couple of decades to reach my goals. As you can see, there's nothing particularly spectacular or magical about my plan. I'm simply leveraging the accounts available to me, keeping a close eye on my finances, and doing my research to stay on course. If you're willing to put in the work now, your future self will thank you as you get closer to the retirement you've always dreamed of.
