Want to be a millionaire by the time you retire? Aim for $1 million (or more). Consider, for example, that the average Social Security benefit is only about $23,000 a year (as of August) and there are relatively few people receiving pensions these days.
If you want a financially secure future, it’s up to most of us to save and invest a lot over the long term. Taking advantage of tax-advantaged retirement savings accounts, such as IRAs, is a smart way to do this. Whether you’re far from retirement or already retired, here are some tips to help you do just that.
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1. Get inspired
The idea of an IRA may not seem all that appealing, so let’s start with a little inspiration. So, consider this: Ted Weschler, one of Warren Buffett’s investment advisors, grew the value of his IRA from $70,000 to $264 million.
Obviously you can do amazing things, but even if you fall short of what Weschler did, say, even if you only achieve 1% of Weschler’s growth rate, that’s still $2.64 million. Even if you only achieve half of that, that’s $1.32 million.
2. Start early
IRA contribution limits change periodically, and for 2024 the limit is $7,000 for most people, with an additional $1,000 allowed for those over age 50. If you start saving money into your IRA early, you can put a lot of money into it and give that money plenty of time to grow. For example:
It invests $7,000 a year and continues to grow.
8% growth
10% growth
10 years
$109,518
$122,718
15 years
$205,270
$244,648
20 years
$345,960
$411,018
25 years
$552,681
$757,272
30 years
$856,421
$1,266,604
35 years
$1,302,715
$2,086,888
40 years
$1,958,467
$3,407,963
Calculations done by author from moneychimp.com.
If it’s too late to start early (for example, if you’re nearing retirement), you can also use an IRA to build assets. Although you should usually build assets with earned income, many people work a little during the first few years of retirement.
3. Consider prioritizing Roth IRAs
One thing to know about IRAs (and 401(k) accounts, too) is that there are two main types of IRAs: traditional and Roth. Consider prioritizing a Roth IRA over a traditional IRA, especially if you’re not that far away from retirement.
Traditional IRAs allow you to take a prepayment tax deduction, meaning that the amount you contribute in a particular tax year can be deducted from your taxable income for that year — so if you contribute $7,000 this year, it will reduce your taxable income by $7,000 and lower your taxes.
With a Roth IRA, you contribute after-tax amounts, so you don’t get a tax deduction up front. But when you withdraw money from the account, as long as you follow the rules, you can do so tax-free. Having hundreds of thousands of dollars, or even more than a million, available tax-free in retirement is a huge benefit.
4. Donate generously
Of course, for best results, you want to max out your contributions for as many years as possible. When the limit is $7,000, aim to contribute $7,000. If the limit increases over time, aim to contribute the new limit amount each year. Once you turn 50, start making catch-up contributions.
Also, remember that the first money you put in is the most powerful, so don’t skimp early on.You can open an IRA account with many good brokerages.
5. Consider a backdoor Roth contribution.
If your income is too high to contribute to a Roth IRA, you may want to consider a specific strategy: a “backdoor” Roth IRA conversion.
Roth IRAs have income limits, whereas traditional IRAs don’t, so you can contribute to a traditional IRA and then convert that IRA to a Roth IRA. You’ll be taxed on the conversion amount in the year you convert, but after that you can let the money grow in the Roth IRA and won’t have to pay taxes in future years (as long as you follow the rules).
6. Invest effectively
It’s not enough to just put a lot of money into one or more IRAs. If you want to become a millionaire, or at least get as close as possible to it, you need to invest that money effectively. If you think you know enough to pick the best or most promising stocks, buy individual growth and value stocks.
But for most people, simple, low-fee index funds are all they need to build strong wealth over time. Here are a few to consider:
7. Be patient
Finally, patience is necessary. Remember Buffett’s guys? Yes, he’s a great stock picker. But he didn’t achieve his phenomenal IRA growth in a few years. It took decades.
See the table above showing how your money will grow: For the first 5, 10, or even 25 years, the numbers aren’t all that spectacular, but by the end, they become pretty impressive.
Whether you start today or tomorrow, don’t put off saving and investing for retirement. Make a proper retirement plan and follow it now.
The $22,924 Social Security bonus most retirees completely overlook
Like most Americans, you’re a few years (or more) behind on your retirement savings. But with a few little-known “Social Security secrets,” you can be sure to boost your retirement income. For example, one simple tip could help you receive $22,924 more each year. When you learn how to get the most out of your Social Security benefits, we think you can retire confidently with the peace of mind we all crave. To learn more about these strategies, click here.
Watch “Social Security Secrets” »
Serena Malanjian has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.
