How Much Should You Have Saved in Your Roth IRA (BY AGE!)

Transcript:

On this episode of the Personal Finance Podcast, how much should you have saved in your Roth? IRA by age.

Whoa. What's up everybody? And welcome to the Personal Finance Podcast. I'm your host Andrew, founder of Master money.co. And today on the Personal Finance Podcast, we're gonna talk about how much you should have. In your Roth IRA by age. If you have any questions, make sure you join the Master Money Newsletter by going to master money.co/newsletter.

And don't forget to follow us on Spotify, apple Podcast, YouTube, or whatever your favorite podcast player is. And if you're getting value outta this show, consider leaving a five star rating and review on Apple Podcast Spotify. Or your favorite podcast player. Now, today we're gonna be diving into how much should you have saved in your Roth IRA by age.

And you guys love these by age episodes. And so we are so excited to kind of go through this with you, uh, because there are is so much to cover in this episode. But before we dive in. In this episode, I wanna talk about the power and the value that is provided by the Roth IRA. Now, if you don't know what a Roth IRA is, it is a retirement account that you can open up and I'm gonna talk about how it works first.

But you can open one up at places like Vanguard. Or Fidelity, or you can open up one at Charles Schwab, there's a bunch of different great places to open one, and if you wanna step by step guide on even how to open a Roth IRA or any investment account whatsoever, if you go to master money.co/investing for beginners, we have a free beginner investing class that teaches you how to open an account.

So to dive into this a little bit more, here is how a Roth IRA works. First is your contributions. So you contribute money or put money. Into a Roth IRA. And when you do that, that is money that has already been taxed. But the Roth IRA has tremendous tax benefits. Well, you say to yourself, well, Andrew, how does it have tremendous tax benefits if the money has already been taxed?

When I put it into the Roth, IRA, here's where the power of the Roth IRA comes in. Because when you invest your money. In the Roth IRA, meaning once you put money in, it's not invested yet. You still have to invest those dollars into something like an index fund or ETF or stocks or bonds or whatever else you want to invest in.

But once you invest those dollars, they grow tax. Free. Okay, so they grow tax free, which is a very powerful thing because over the long term, let's say for example, you put money into a Roth IRA, and you max it out over the course of 30 years, you have over a million dollars in that Roth IRA. Well, if you have over a million dollars in your Roth IRA over those 30 years, you're gonna have over $850,000 that is completely tax free that you never had to spend a dollar of tax on.

Because then when you reach retirement age, which. The Roth IRA requires you to be 59 and a half before you can pull this money out. You can pull the money out tax free. Now, there's other rules involved in this that we will go into in a second, but this tax free growth is so incredibly powerful because if you are a long-term investor.

That long-term growth that is completely tax-free will be the majority of your account. It'll be a huge, huge portion of your account as time goes on. Now, if you pull the money out before age 59 and a half, you will have a 10% penalty. Now, this is only on the growth, the money that you contributed. You could pull that out at any point in.

Time, so your contributions, you can pull those back out. Now, I don't recommend it because I don't recommend interrupting compound interest unnecessarily, but you can at any time withdraw your contributions tax free and penalty free. Now, another great thing about the Roth IRA is Roth IRAs don't have what are called required minimum distributions.

So things like your 401k in your traditional IRA, they are going to require you at a certain age to start pulling money out. Why? Because you have. Haven't paid taxes on those dollars yet, and Uncle Sam always wants you to pay your taxes. And so at some point in time, they're gonna require you to start pulling your money out of your 401k or your traditional IRA in order for you to be able to pay taxes.

But this is why it's so incredibly powerful with the Roth IRA is you don't have to worry about those required minimum. Distributions. Now there's contribution limits and there's income limits with the Roth IRA. And we're gonna talk about how to get around some of those income limits here in a second.

But if you are under the age of 50, at the time I'm recording this, and this usually goes up every couple of years, but the contribution limit is $7,000 every single year. Okay. And then age 50 and. Older it is $8,000 per year. So you have this cool thing called a catchup contribution if you are over the age of 50.

So you are allowed to put an additional thousand dollars as a catchup contribution at the time of recording this. Now there are income limits to the Roth IRA for single filers. If you want full contribution, uh, it is $150,000. And as your income starts to grow there, then it starts to get phased out a little bit.

But I'm gonna show you how to get around this in a second. And if you are joint. Filers, then your full contribution is $236,000. That's the most you can make to contribute to a Roth IRA. If you make too much money to contribute to a Roth IRA, you can do what is called a backdoor Roth, IRA. Now in a backdoor Roth, IRA.

We've done entire episodes on this, and we've also done one on the mega backdoor Roth IRA. But the way that this works is that you open a traditional IRA. Put money into the traditional IRA and then convert that money to a Roth IRA. So if you make too much money, those are the steps that you would want to take, and you can look deeper into this to see if it works for you.

But I do that every January of every single year as I do my backdoor. Roth IRA is one of the most important things that you could do as a high income earner is understanding that you can still contribute to a Roth IRA now. To have a Roth IRA. One big thing to note is that you must have earned income.

It's very important to understand that if you have zero earned income, meaning you don't have a salary or a W2 income, you cannot open a Roth IRA and contribute to it. You must have earned income. So if you're looking at this and saying to yourself, oh, I got a newborn baby and I wanna contribute money to that Roth, IRA.

In their name. You can't do that. You must have earned income to be able to open a Roth IRA. Now, if you have a spouse who doesn't work, but you do work, you can open a spousal Roth IRA, which allows you both to have your own Roth IRAs and contribute to those. And I highly recommend that if you are married, that you each open your own Roth IRA and try to max those out because these dollars are so powerful because of that tax free.

Growth. Now, there are other important considerations that I'm gonna hit on in this episode. Uh, really quick, up top here, and then we'll get into, uh, how much you should have in your Roth IRA by age. There's also something called the five year rule. Now, the five year rule applies to your earnings within the Roth IRA.

So to withdraw your earnings tax free, the account must be open for at least. Five years now, contributions can be withdrawn at any time without penalty, but the earnings you have to at least have it open four or five years, and you must be obviously over the age of 59 and a half like we discussed earlier.

Now, rollovers and conversions are another big thing that we just talked about, but you can roll over funds from a traditional IRA. To a 401k or into a Roth IRA, but taxes are owed on that converted amount. And that's the big caveat that I want you guys to understand because a traditional IRA, when you put money into a traditional IRA, if you did not pay taxes on that money or if you got that taxes deduction at a previous year, you will owe taxes when you roll it over.

Now if you did not do a deductible contribution, meaning if you put money into the traditional IRA but did not get a deduction on that, that's gonna be similar to the backdoor Roth IRA, then you will not have to pay taxes on that money, uh, because you did not have a deduction on that. Beneficiaries is a big one.

You must make sure that you have beneficiaries on your Roth IRA. So if anything ever happened to you, you actually are ensuring that that money is going to the right person and those balances can be passed down to heirs tax. Free. Another amazing benefit of the Roth IRA, making it a fantastic, amazing generational wealth tool.

Now, there's also no age limit, uh, for contributions. As long as you have that earned income, you can contribute regardless of your age. So if your kid is a YouTube Child star, uh, then you can contribute to a Roth IRA as long as they have earned income, and you can only contribute up to that specific earned.

Income. Now contributions are not tax deductible. Unlike traditional IRAs. Traditional IRAs are tax deductible when you contribute to them. The Roth IRA is not. You're gonna get taxed somewhere and Uncle Sam will always get their money. And so you gotta make sure that you just know where that is. And the biggest advantage.

Of the Roth IRA is the ability to withdraw this money tax free in retirement. So that is the quick breakdown of the Roth IRA and how it works. I wanted to make sure that everybody listening to this episode understands how powerful the Roth IRA is. And you may be asking yourself, well, when should I start investing in a Roth IRA?

If you have an emergency fund that has at least three months of cash inside of that, you can start investing in a Roth IRA. That is one of the first investment accounts that I would be interested in if I was a new wealth. Builder is making sure that I am contributing to the Roth IRA, because it is so incredibly powerful because of that tax-free growth.

And we're gonna show you how powerful it is next because we're gonna break this down by age. All right? So really excited to do this by age section. First, we're gonna go through the twenties. And in your twenties, this is going to be something where I want you to understand how powerful it can be if you start to max out your Roth IRA from various ages.

So in the twenties we're gonna talk about the goal being by age 30, here's how much you were gonna have in your Roth IRA. If you start maxing it out now. With all these calculations, we did a 10% rate of return. If you want to use an 8% or a 7% rate of return, go for it. More power to you. Uh, nothing wrong with that, but the way that we got the 10% rate of return is we just looked historically at the s and p 500 and what that had returned, and that is where we got the 10% rate of return.

Just Google s and p 500 historic returns, and you will see what pops up there. So at the time recording this, that is where it is. If we are way in the future and something changes, uh, we will let you know. So. In your twenties. Let's look at that first. So if you started contributing to a Roth IRA and maxing that out at age 20, by the time you turned age 30, you would have $104,561 in a Roth IRA.

So you'd hit your first a hundred K by age 30 in a Roth alone because you had a decade to do this. Whereas if you're starting at age 25, you would have $35,735 in your Roth IRA. That's a big, big difference between the two of them. And one thing I want you to note is everybody listening who is. In their twenties, or who knows, someone in their twenties.

Maybe you have a sibling, or maybe you have a spouse who's in their twenties or maybe you know, uh, of other people who you mentor who are in their twenties. This is the most important time to get started investing. Why? Because you have the most valuable asset of all, which is time. And the earlier you start investing your dollars, the more time you will have for those dollars to compound and grow.

And if you can. In your twenties, if you make no other financial goals, make your biggest financial goal to be to max out a Roth IRA every single year. You cannot get these years back. You cannot go backwards and start to make extra contributions. You can only put the $7,000 per year inside of the Roth IRA.

So you have the most valuable asset that everybody else listening to this podcast who has not opened a Roth IRA does not have you have time. Time is amazing in a Roth IRA because the more time you have, the more compound interest is going to grow. The more your investment snowball is going to grow over time, the less you will have to pay in taxes on those investment returns.

And the larger your account will be, you're gonna see how big your account can get. I'm gonna go all the way into the sixties and I'm gonna talk to you in the twenties and show you how big your account can get when we get to those age ranges. Now. Tips to max this out. Number one is I want you to think through automating contributions directly from your paycheck every time you get paid.

If you just automate those contributions into a Roth IRA, and make sure they are invested. Because the number one mistake that I see people make with their Roth IRA is they. Do not invest their money. They put money in a Roth IRA and they think it's an investment. It is not an investment. This is the vehicle that allows you to invest your dollars.

Once it's in a Roth, IRA. If you don't invest your money, you'll have a 0% rate of return and your money will never grow. You have to take that second step and invest those. I wanna make sure every single person understands this because I have seen so many people who have had a Roth I a for a decade, but never invested their money and did not reap the benefits of that compound interest.

And so you've gotta make sure that you are investing your dollars. Two is as your salary increases people in your twenties, I want you to make sure that you increase your contributions if you don't have the capability to max it out right now. Every single time you get a raise, take 50% and increase your Roth contributions and take the other 50% and enjoy your life.

But I want you to be able to grow your Roth contributions over time until you get to that max number. Your goal should be to try to get to that max number as soon as you possibly can. Three is use your windfalls. If you're gonna get a tax return, like I'm recording this right around tax season, if you are gonna go out and get a tax return, utilize that to fully fund your Roth IRA.

That's an amazing way to do that. Or if you get some sort of. Windfall like a bonus. Use that to fund your Roth. IRA do not delay because you cannot get those years back. Now, some of the biggest challenges for a lot of people in their twenties is A, we start off with lower incomes. When you're in your twenties, this is a timeframe where usually you don't make as much as someone in their thirties or forties.

Your thirties and forties are the high earnings years, but you start to lose out. More and more on time, but that is okay because even getting any amount inside of a Roth IRA is going to be powerful. I don't care if you can only invest $20 a month, you still should be getting those dollars in a Roth IRA and allowing this to compound over time.

Also, a lot of people. Within this age range are gonna be struggling with things like student loans and other different financial burdens that may come about. And so just making sure that you learn how to navigate those. Keep listening to this podcast. We have so many episodes that come out that teach you how to navigate some of those challenges, and I want you to try to overcome this.

Start gradually and start small. If you cannot max it out and try to gradually increase those contributions. Maybe play a game with yourself and increase it by 1% every single month and see if you can get in a point in time where you get to maxing. This out. One big thing that I like to do too is I like to break this down into monthly.

So let's say for example, you wanted to and figure out how much do I need to contribute to a Roth IRA every single month? Will it be $583 every single month is what you need to get into your Roth IRA. So if you can move that money over every single month, that would allow you to grow your wealth over time.

And so $583. Is the magic number right now, and if you are over the age of 50, it is $667. And so those are some of the tips for folks in their twenties. Now let's get to the thirties. Alright, if you are in your thirties, now is the time to buckle up. This is the timeframe that I want you to start making sure that you have cash going into a Roth IRA, so that over time you can grow your.

Wealth. This is gonna be one of the most powerful ways that you can grow your wealth over time. And so for someone who started at the age of 20 and they wanted to look at, okay, well, I went through my thirties. I also started to max out my Roth IRA in my thirties. I went through my twenties and my thirties, and now by age 40, here's how much they would have in their Roth IRA.

They'd have $393,925. The person that started at age 25 would have $215,407. Now if you start at age 30, if you are in your thirties, and obviously you had that first decade, it's gonna be $104,000. And then at age 35, it's gonna be $35,735. Now folks in their thirties, a lot of them are gonna have some additional financial struggles outside of just what they had before.

A, you are probably gonna have less time than you had in your twenties. In your twenties. Maybe you had a little more flexibility and freedom even though it didn't feel like it. Maybe you didn't, but for some situations you may have had a little more flexibility. 'cause in your thirties, you're gonna start to get married.

Maybe you're gonna have kids. Maybe life is just gonna get busier within your career because your career is taking off and you're taking on management responsibilities. And so your time is. Dwindling. This is where it gets messy. It gets tough. It feels like every single hour of your day is focused on something.

Uh, and so you're losing time. You're losing out on some of those things that you really wish that you had back. And so maxing out your Roth IRA before contributing to other retirement accounts. Maybe one of the biggest priorities for you as you go on and try to look at this, maybe you have kids and daycare costs are eating away at some of this stuff too, and so we gotta figure out ways.

To navigate this, and so one big tip is to figure out ways to earn extra income. One is negotiate your salary. These are key earning years in your thirties and forties, and so we wanna make sure that we are negotiating our salary. We're looking at things like side hustles to help boost our income so that we can ensure that we are maxing out that Roth IRA.

And then also adjust your contributions whenever you get a raise. Continue to be doing that just like you were in your twenties to try to get to that max out number if you have not already. Now, lifestyle inflation is a big deal for a lot of people in their thirties. A lot of folks are having kids and family members, and all these expenses are arising, and so the way to overcome this is to automate your contributions and treat savings like a non-negotiable.

Bill. Too many people out there do not treat savings as a non-negotiable bill, but that's exactly what it is. If you wanna learn how to build wealth, you need to treat your savings as a non-negotiable bill. No if ands or buts about it, that is the way it has to be. You need to pay yourself first and then spend what is left over.

That is the key in automating. This is the way that I would look at doing this because you can see the power of this. Someone who starts early enough is going to have a really large Roth IRA that they can utilize. And pull and draw down tax free. Now let's get to the forties. Alright, so if you are in your forties and your goal by age 50 is to max out your Roth IRA, here is what is gonna happen if you've got a 10% rate of return.

So the person who started at age 20. Okay, 30 years down the line, by the time they turned age 50, they're already gonna be the first ones to have a million dollar Roth IRA. Meaning that if you maxed it out from age 20 to age 50, you would have $1.374 million if you're the person who started at age 25.

That five year difference, look at this difference here guys. Look at the difference. If you just waited five years is a half a million dollar difference because the person starting at age 25 would have 849,000. Dollars. If you started at age 30, you'd have $514,000. If you started at age 35, you'd have $284,000.

At age 40 is 104,000, and age 45 is $35,000. This is the amazing power of compound interest and allowing time to grow your wealth over time. I can't wait to show you what this is gonna be in the sixties as we go through this, but this is why it is so incredibly powerful. Now tips to maxing out your Roth IRA in your forties.

Obviously, all the other things we talked about in their twenties and thirties are going to apply here in your forties. But in addition, I want you to continue to make sure that maxing out your Roth IRA annually at that $7,000 per year is a very high. Priority and that you're using bonuses, you're using extra income.

Your income should be high enough in your forties where you are now maxing out your Roth IRA. Now, if you started over your career or you just never got your income over that hump, now is the time to take this seriously because statistics show that people in their thirties and forties are gonna have their highest earning years within those two decades.

And so because of this, we need to make sure that we are earning as much as we possibly can. This can be our highest earning potential. Now, can you earn a lot in your fifties as well? Absolutely. Your sixties, whatever else. That is without question, but you need to make sure that you are getting these dollars into the retirement accounts, uh, as time goes on.

And then you wanna make sure that you are balancing your portfolio and have a portfolio strategy within that Roth IRA that fits your risk tolerance. That is a very important caveat. Now, a big challenge for a lot of people here is saving for kids college. Or maybe you have a mortgage and you are trying to figure out how to prioritize your.

Roth IRA over all these different things, but you gotta make sure that you are prioritizing your retirement over some of these other things like saving for your kids college. You gotta take care of yourself first, then you can help others with what is left over. We call that the oxygen mask method because it's the same thing as when a plane is going down.

When the plane is going down, what do they tell you to do? You can take care of your oxygen mask first, then you can help other people. And because of that, that is what we teach here. When it comes to your money, there are no loans for retirement. There are loans to go to college, but there are no loans for your retirement.

So your retirement needs to be taken care of first before you help your kids with their financial goals. So that is gonna be a huge one for a lot of people in their forties. 'cause I know, hey, maybe you just aren't maxing at your Roth IRA, but you're also putting a lot of money into a 5 29 account. You need to pause those 5 29 contributions, move it over to the Roth IRA, so that you can get your retirement taken care of.

That is a huge, huge thing that you need to do. So let's go into the fifties and let's see how far our money has grown. Alright, folks, in your fifties, you get to take advantage of this amazing thing called the ketchup contribution. So you can actually put an additional $1,000 every single year if you are age 50 and above.

So let's. See what would happen for folks, uh, by age 60. Let's see what would happen if they invested their dollars and what happens if they started there. And this is also gonna include the a thousand dollars catch up contribution for everybody within this category. So if you started at the age of 2020 year olds, this number is absolutely amazing.

This is where it would be when you could start to pull money out. And this is the power of compound interest and why it is so amazing. So if you started investing in a Roth fire eight. At age 20 and you maxed it out every single year with a 10% rate of return, by the time you turned age 60, you would have $4,473,933.

In that Roth IRA, if you start at age 20, you just absolutely change your life. But here is how crazy it is if you started five years later, because if you started at age 25, you would have 2,000,925. Thousand dollars in your Roth IRA. Still an amazing balance within your Roth IRA. It is a $1.5 million difference from the person that started at age 20.

Now, most of us do not have $7,000 to put into a Roth IRA at age 20. I know I didn't. And so it's one of those things where, sure, it is a catch 22, but. Time is so amazing when it comes to compound interest. Starting at age 30, you would have $1.874 million in your Roth IRA, and a huge portion of that would be completely tax free at 35 1 $0.187 million.

If you started at age 40, you'd have $727,000 in your Roth IRA at age 45, 420 $4,000. In your Roth IRA at age 5,227, and at age 55. If you started, then you would have $87,931 in your Roth IRA. By the time you turn age 60. Again, all of those numbers are the age that you started by the time you turn 60, and so that is where it is absolutely amazing what you can do when you start to max out your Roth IRA and what time can do for your money.

Now, tips to max out in your 50 is always, always, always take advantage of that ketchup contribution, meaning that if you started. You can max out with the full $8,000 per year every single year, and I would consider delaying retirement to keep contributing to growing your accounts if that is something that you're interested in and you enjoy your job, because that is something you could do to continue to grow your account over time and then focus on higher growth investments while gradually shifting to conservative assets as you start to approach retirement age.

And so what you wanna do is. Typically, most people as they reach retirement age, they consider adding some more bonds to their portfolio to kind of reduce that volatility. If you didn't hear our recent episode where we talked about the top portfolios and we kind of went through 10 different types of portfolios, that shows you the impact of bonds on volatility, and we actually go through that and show you some of the portfolios that are ranked from best.

To worst. And so that is one big thing that you wanna think through. Now, some challenges for a lot of folks within their fifties is A, how do they navigate that market volatility and make sure that they are not selling assets at the wrong time? And B, how do they navigate healthcare expenses as those healthcare expenses begin to rise in their fifties?

And so those are two big things that you'd want to try to overcome. But one big piece of that is try to diversify your portfolio and build that emergency fund. Making sure you have that emergency fund in place will ensure that you do not interrupt compound interest. Unnecessarily. So let's jump into the sixties.

And in the sixties, I mean, some, some of these numbers are unbelievable, uh, by age 70. Obviously it's a really long time for this to grow. But let's jump in this really quick. The last one is, I don't wanna leave folks out who are in their sixties, so we are gonna do one for your sixties as well. And for the folks who start at age 20, by the time they turned age 70, if they maxed out a Roth IRA, now granted this is 50 years of maxing out a Roth IRA at a 10% rate of return.

But if that was the case. And you started at age 20, you'd have $13,582,000 in your Roth IRA. If you started at age 25, you'd have 9,078,000. If you started at age 30, you'd have 5.8 million. At age 35 you'd have 3.7 million. You can see the massive difference on just waiting five years when it comes to compound interest at age 42.3 million.

At age 45, you'd have 1.4 million at age 50, 809,000 at age 55, 390 2000 at age 60, 142,000 at age 65, 60 $3,000. And so for those who are in their sixties, tips here are to continue contributing until you can earn enough, uh, that it makes sense. And then plan your withdrawal strategically to avoid depleting your savings too quickly.

So that's the big thing you wanna do, uh, is making sure that you are thinking. Through this. Now I wanna talk through lastly here on common pitfalls and why people miss their targets on the Roth IRA one is procrastination. A lot of people have heard about a Roth IRA, but they're just not interested enough in trying to learn more about it, and so they procrastinate on getting started.

As you can see here, the last thing that you wanna do is procrastinate. It could be a multimillion dollar decision to just wait five years. To contribute to your Roth IRA, making sure you start early is really, really important. Another common pitfall is people don't automate this process. Relying on your willpower is not the way to be successful with your money, and so automating this process and becoming fully automated with your investments is the number one thing that you need to make sure that you are doing and not increasing contributions.

When your salary grows, making sure that you can get to that max out number is very important, and if you are just consuming every single dollar that comes in as your salary grows, that means that you are allowing lifestyle inflation to take over. Instead, what I want you to do is take a portion of that and put it towards your Roth IRA or your retirement accounts, and you can take the other portion and put it towards things that you love, but you gotta make sure that you are intentional about where you are putting your dollars.

And so that is gonna be a big, big deal for a lot of people. So here's my call to action to you. Is, I want you to start to think through this and think about what do I want outta my retirement? And if you wanna have an amazing retirement, a Roth IRA is a very, very powerful source to be able to help you through that process because the tax free growth and there are so many different tools that you can utilize out there that are gonna help you with your Roth.

IRA. Listen, if you guys are interested in learning more about the Roth IRA or just how it works, we have a free guide, uh, and it's the Roth IRA quick. Guide. If you go to master money.co/resources, we have it there and you can check that out as just a really quick, we try to condense all this information into one quick and easy guide so that you can have an understanding of how the Roth IRA works.

And again, if you wanna learn how to open that account, just go to master money.co/investing. For beginners, and in that free workshop we teach you how to open a Roth IRA. It is every Tuesday night at 8:00 PM So again, thank you guys so much for listening to this episode. Our goal is to bring you as much value as we possibly can.

I hope we did that today. If you guys have any questions, please join the Master Money Newsletter and you can ask a question when any of those newsletter issues come out. Also, don't forget to follow us on Apple Podcast, Spotify. YouTube or whatever your favorite podcast player is, and cannot thank you guys enough for being here.

We will see you on the next episode.