It may seem that accumulating enough for retirement requires a lot of money. And if you save for this step with just your contributions, it can be.
But if you invest your money and enjoy the stock returns, you can potentially grow your account to $ 1 million by making and investing an annual contribution to an IRA. Here’s how.
What is an IRA?
An IRA is an investment account that can help you save money for your retirement. You can invest the money you put in an IRA and it grows tax free. If you meet certain conditions, you can add to this account and your contributions may also be eligible for a deduction from your taxable income.
The amount you can contribute has increased from $ 1,500 since 1975, when this investment account was first created, to $ 6,000 in 2019. It is possible that this number will continue to increase in the future and if so, those projections will change. But using the current contribution limit, that’s how much your account could grow over the next 30 years.
How your accounts could grow
The table below shows what would happen if you invested $ 6,000 each year for 30 years at different rates of return. As you can see, the return your investments ultimately generate is less than the $ 180,000 in contributions you make.
|Return rate||Return won||Total|
What it takes to earn these fares
The rate of return you earn each year in your IRA depends on how you invest your money. While a more conservative approach (i.e. one that leans heavily towards bonds) can protect your gains, it can also limit your upside potential. And it’s wise to revise your asset mix over time as your time horizon narrows.
Between 1926 and 2020, you could have earned 6% if you had a portfolio made up of 100% bonds, 7% with a mix of 20% stocks and 80% bonds, 8% with 40% stocks and 60%, 9% with 60% stocks and 40% bonds, and 10% with 100% stocks.
The riskier your portfolio, the more you can potentially earn in the long run. But you can also lose more during bear markets.
For example, even though large-cap stocks gained an average of 4% more each year than bonds during this period, their worst year resulted in a loss of 43.1%. The worst year for bonds over the same period was an 8.1% loss. Withstanding a year of negative losses like this early or in the middle of your career might not have a huge impact. But as retirement approaches, this type of loss could be devastating.
This is why, rather than having an asset allocation for your entire life, you will likely have a combination of them. And as your time horizon gets shorter, you might want your investments to move in a more conservative direction. As you make these changes, the projections of your money’s potential growth will change as well. And if you’re working towards a certain goal, reviewing those adjustments every year could help you keep your goals in line with the time frame in which you hope to achieve them.
With enough time before you retire, you could significantly increase your accounts without needing large sums of money. But contributions alone are unlikely to be enough. And how you invest your money, combined with how consistent you make those contributions, could determine how much money you end up with.