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Roth IRA Plan for 20-Year-Olds
It’s always nice to help the newer generations avoid the mistakes we’ve made. One common thing you hear folks say is “I wish I would’ve saved/invested more when I was younger”. That sounds great, but when we were younger, the benefits didn’t seem real. There was no “tangible” payback that enticed us enough to put away more for the future. Well, here’s a plan for those 20-year-olds out there…
While this article uses a 20-year-old as an example, it applies well to anyone who is in their younger years. By applying the plan below, you may not have to do any other retirement saving/investing!
Using the “rule of 72”, we know that if you divide 72 by any rate of return, the resulting number is the time it takes to double your money. So, if we assume a 7.2% rate of return, which the S&P 500 index has far outperformed over its history, an invested dollar would essentially double every 10 years (72 divided by 7.2).
Here’s where it gets fun! If a 20-year-old puts $6,000 into a Roth IRA, that money would double every decade, assuming that 7.2% return.
By age 30, that account could be worth $12,000.
By age 40 = $24,000.
By age 50 = $48,000.
By age 60 = $96,000.
And because the money was put in a Roth IRA, the distribution is tax-free! So in the above example, this 20-year-old could have a $96,000 tax-free income at age 60.
Now, let’s assume that 20-year-old does the same meager $6,000 contribution at age 21. That money would grow to $96,000 by age 61, so our 20-year-old could take another $96,000 at age 61.
Do that again at 22 and take another $96,000 at 62. Do that for 30 years…simply contribute $6,000 per year into a Roth IRA starting at age 20 until age 50, and our 20-year-old could have a $96,000 tax-free annual income from age 60 to age 90!
Without any other contributions. Without even keeping up with contribution max limit increases (Roth’s already allow $6,500 per year). Without contributing past age 50.
If you’re concerned about inflation for your 20-year-old, then suggest increasing contributions to meet the max limits allowable. That’ll increase the tax-free benefit in those later years.
Hopefully this provides a fun, realistic example you can show a 20-year-old on how to reap the benefits of Einstein’s “8th wonder of the world” (compound interest)!
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