These days you’re constantly bombarded with ads telling you to start saving for retirement as soon as possible. If you’re finally ready to look into it for yourself, a great place to start is with Individual Retirement Arrangements (IRAs). A Roth IRA is one type out of several. The money you put in doesn't get you a tax deduction, but it grows tax-free, and when you make withdrawals you might not have to pay tax on your interest if you wait after age 59 ½.
How much you get out of your Roth IRA depends on how much you put in and what investment returns you can generate. It also depends on when you start saving and when you start taking withdrawals. Compound interest can be a wonderful thing if you give it time. If you’re age 35 now and you put in $1,000 a year to age 65, your money will grow to $58,328.34 if you earn an average return of 4 percent. If you started five years earlier at age 30, you would have $76,598.31 at the same age -- 31 percent more money.
How you decide to take your money out of your Roth IRA can affect the amount of money you receive annually. Regular cash withdrawals give you more flexibility and keep your funds accessible, but you run the risk of taking too much out over time and running out of money. A life annuity from an insurance company promises to pay you every month until you die. You’re more locked-in with that option but at least you won’t run out of money while you’re alive. The catch is that when you die the insurance company keeps whatever is left over, even if it happens the very next day.
There are plenty of online calculators that will help you calculate the accumulated value of contributions as well as calculate how much a life annuity would pay you. Take for example a $1,000 annual deposit from age 30 to 65 earning 4 percent annually. You already know that will accumulate to $76,598.31. A life annuity for that much money at age 65 would pay you $393 a month or $4,716 a year, according to one life annuity calculator. Once you know how much a particular contribution can generate in income, increasing that contribution by a certain percentage will have the same effect on your estimated income on the back end.
If you decide to make cash withdrawals, you should determine your safe withdrawal rate -- the amount you can safely take out every year and not risk outliving your money. This depends on how your money is invested, how long you expect to live and whether you want to leave an inheritance behind or are content with spending all of your investment. A commonly cited figure is 4 percent annually as a safe withdrawal rate. This means that you could withdraw about $3064 every year from your $76,598.31 Roth IRA and hopefully not run out of money before you run out of time. But there are no guarantees.
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