Why should YOU invest in a Roth IRA
Oct 01
Compound Interest is a great thing and it’s how I’m going to be able to retire. If you invest $100 and earn 10% interest on that $100 a year you will earn $10 the first year, $11 the second year, and $12 the third year.| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | |
|---|---|---|---|---|---|---|
| Starting Balance | $100.00 | $110.00 | $121.00 | $133.10 | $146.41 | $161.05 |
| Interest Earned | $10.00 | $11.00 | $12.10 | $13.31 | $14.64 | $16.11 |
| Ending Balance | $110.00 | $121.00 | $133.10 | $146.41 | $161.05 | $177.16 |
That is very simple to make it easy to understand but it’s not realistic.
A realistic interest or growth rate is 7% per year after inflation. Inflation is when costs go up. For example when gas prices go up that is inflation. Historically investing in the stock market results in a 7% growth rate on top of the inflation rate. Some years the growth is higher and some years the stock market goes down, but in the end it is an average of 7% a year over every 20 year period in history.
If you put $500/month into a Roth IRA account for somewhere between 15 and 20 years you won’t be able to touch it until 6 months after your 59th birthday, but when that happens there will be a LOT of money in that account. Here is a table showing how much money will be in that account. I am assuming that you’ll invest in a plain, simple, and boring 500 Index fund* and just let it sit there without trying to beat the market.
| Year | Deposits | Interest | Total Deposits | Total Interest | Balance | |
|---|---|---|---|---|---|---|
| 2022 | $6,000.00 | $232.44 | $6,000.00 | $232.44 | $6,232.44 | |
| 2023 | $6,000.00 | $682.98 | $12,000.00 | $915.42 | $12,915.42 | |
| 2024 | $6,000.00 | $1,166.09 | $18,000.00 | $2,081.51 | $20,081.51 | |
| 2025 | $6,000.00 | $1,684.13 | $24,000.00 | $3,765.64 | $27,765.64 | |
| 2026 | $6,000.00 | $2,239.62 | $30,000.00 | $6,005.26 | $36,005.26 | |
| 2027 | $6,000.00 | $2,835.26 | $36,000.00 | $8,840.52 | $44,840.52 | |
| 2028 | $6,000.00 | $3,473.96 | $42,000.00 | $12,314.48 | $54,314.48 | |
| 2029 | $6,000.00 | $4,158.84 | $48,000.00 | $16,473.32 | $64,473.32 | |
| 2030 | $6,000.00 | $4,893.22 | $54,000.00 | $21,366.54 | $75,366.54 | |
| 2031 | $6,000.00 | $5,680.69 | $60,000.00 | $27,047.23 | $87,047.23 | |
| 2032 | $6,000.00 | $6,525.09 | $66,000.00 | $33,572.32 | $99,572.32 | |
| 2033 | $6,000.00 | $7,430.53 | $72,000.00 | $41,002.85 | $113,002.85 | |
| 2034 | $6,000.00 | $8,401.42 | $78,000.00 | $49,404.27 | $127,404.27 | |
| 2035 | $6,000.00 | $9,442.50 | $84,000.00 | $58,846.77 | $142,846.77 | |
| 2036 | $6,000.00 | $10,558.84 | $90,000.00 | $69,405.61 | $159,405.61 | |
| 2037 | $6,000.00 | $11,755.88 | $96,000.00 | $81,161.49 | $177,161.49 | |
| 2038 | $6,000.00 | $13,039.46 | $102,000.00 | $94,200.95 | $196,200.95 | |
| 2039 | $6,000.00 | $14,415.82 | $108,000.00 | $108,616.77 | $216,616.77 | |
| 2040 | $6,000.00 | $15,891.68 | $114,000.00 | $124,508.45 | $238,508.45 | |
| 2041 | $6,000.00 | $17,474.23 | $120,000.00 | $141,982.68 | $261,982.68 |
Then after 20 years if you stop contributing to it but it will keep growing until it will be legal to start using the money in that account. Needless to say if you keep investing until you turn 60 you’ll have much more money than this in the account.
| Year | Deposits | Interest | Total Deposits | Total Interest | Balance |
|---|---|---|---|---|---|
| 2042 | $0.00 | $18,938.75 | $120,000.00 | $160,921.43 | $280,921.43 |
| 2043 | $0.00 | $20,307.83 | $120,000.00 | $181,229.26 | $301,229.26 |
| 2044 | $0.00 | $21,775.89 | $120,000.00 | $203,005.15 | $323,005.15 |
| 2045 | $0.00 | $23,350.07 | $120,000.00 | $226,355.22 | $346,355.22 |
| 2046 | $0.00 | $25,038.05 | $120,000.00 | $251,393.27 | $371,393.27 |
| 2047 | $0.00 | $26,848.05 | $120,000.00 | $278,241.32 | $398,241.32 |
| 2048 | $0.00 | $28,788.90 | $120,000.00 | $307,030.22 | $427,030.22 |
| 2049 | $0.00 | $30,870.05 | $120,000.00 | $337,900.27 | $457,900.27 |
| 2050 | $0.00 | $33,101.65 | $120,000.00 | $371,001.92 | $491,001.92 |
| 2051 | $0.00 | $35,494.57 | $120,000.00 | $406,496.49 | $526,496.49 |
| 2052 | $0.00 | $38,060.47 | $120,000.00 | $444,556.96 | $564,556.96 |
| 2053 | $0.00 | $40,811.07 | $120,000.00 | $485,368.03 | $605,368.03 |
| 2054 | $0.00 | $43,762.16 | $120,000.00 | $529,130.19 | $649,130.19 |
| 2055 | $0.00 | $46,925.73 | $120,000.00 | $576,055.92 | $696,055.92 |
| 2056 | $0.00 | $50,318.00 | $120,000.00 | $626,373.92 | $746,373.92 |
This will be tax free money, which is the thing about a Roth IRA that is so beautiful. There will actually be more money than this in the account, these numbers are adjusted for inflation and are REAL numbers using today’s prices for food and electricity, not the prices that we’ll be paying to live in 20 years. Sure, a tax free income of $50,000/year isn’t a fortune, but I can live on that. And that’s why you want to invest in a Roth IRA!
* Warren Buffet put out a challenge where if a financial advisor could beat a 500 Index Fund over the course of a couple of years he would give the financial advisor $1 million but if the financial advisor didn’t beat the 500 index fund he had to make a $1 million donation to a charity of Buffet’s choice. One person took him up on the challenge and he had to pay out. Investing in a boring Index Mutual Fund that tracks the Fortune 500 is actually better than trying to manage our investments ourselves.