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Planning for a Roth IRA it is a little different from most other pension assets. This tax-advantaged account generates entirely tax-free income while effectively increasing the value of your retirement and Social Security benefits.
That changes your options compared to having a pre-tax 401(k) or another non-Roth account.
For example, say you have $1.2 million in a Roth IRA at age 60. The good news here is that, overall, you’re in a pretty good position. You probably don’t need to do much to ensure that this portfolio generates a comfortable income in retirement, but it all depends on your personal circumstances.
Here’s how to think about it, and you can also be combined with and talk to a financial advisor on your personal situation.
Retirement income for most families is a balance of portfolio earnings and Social Security.
First, Social security. Without knowing more, we assume average benefits, which in 2024 will come to $22,884 per year ($1,907 per month). Since the rest of your income comes from a Roth account, you will only calculate taxes based on those benefits. The taxes on these benefits will depend on how much other income you have, but you can expect 0%, 50% or 85% of yours. benefits to be taxed.
From there, we can view your Roth IRA.
Much of your portfolio income will depend on your personal investment and retirement situation. For example, let’s say you plan to retire at the full retirement age of 67. This gives you seven more years of portfolio growth for an already solid Roth portfolio. How much you have in this portfolio at retirement (and, as a result, your total income) will depend heavily on your investment choices and risk tolerance.
For example, let’s say that for the next 7 years you will continue to contribute 10% of a median US income ($7,500 per year in contributions). Based on your investment choices and rates of return, your portfolio could grow to: :
S&P 500 Average (10%, High Volatility) – $2.4 million at age 67
Balanced Portfolio Average (8%, moderate volatility) – $2.12 million at age 67
Corporate Bond Average (6%, Low Volatility) – $1.86 million at 67 years
10-Year Treasury Bond Current (4.63%, lower volatility) – $1.7 million at 67 years
At a 4% withdrawal rate, starting at age 67, each of these portfolios could yield a combined annual income (portfolio and Social Security) of:
S&P 500 – $118,884
Balanced – $107,684
Corporate Bonds – $97,284
Treasury Bonds – $90,884
Or, alternatively, you can invest in an annuity. Say you put your $1.2 million Roth IRA into an annuity now, with a payment date seven years in the future. A representative The lifetime annuity could yield $137,856, with a combined income of $160,740. While higher than any of your other options, unlike portfolio income, your annuity payments will not be adjusted for inflation.
From there, the good news is that we can stop the analysis. Since this is a Roth IRA, your income will be entirely post-tax. So we can assume that this entry is complete as it is. Plus, you don’t need to plan RMD or other tax matters. In other words, these are the numbers you have to work with.
Need help writing your numbers? Connect with a financial advisor for free.
In any case, even at a rate of 4.63% Treasury bond rate, at the age of 67 your portfolio can yield an income significantly above the median. In fact, depending on your investment strategies during retirement, you may be able to collect even more than our assumed income.
However, the question is whether this portfolio can generate enough money to last you for the rest of your life, not your middle life. That depends entirely on your personal expenses, which means budgeting for your spending. Among other issues, consider:
Accommodation expenses: Do you own or rent a home? If you own, what does it cost to maintain, insure and otherwise maintain your home? If you rent, what kind of increases should you expect?
Medical expenses: Medical and insurance expenses are particularly high in retirement. Be sure to budget for out-of-pocket expenses, gap insurance, long-term care insurance and other needs.
Lifestyle expenses: Do you like to travel? What kind of hobbies do you have? Do you eat out? In general, what kind of lifestyle do you like and what does it cost to maintain?
Real estate expenses: Do you have any specific heritage wishes for (hopefully many) next? What would you like to leave behind, and what kind of assets would you need?
Basic expenses: Finally, what are your basic bills? In other words, in addition to housing, what is your bottom line for each month?
All of these issues are specific to your personal situation. They are also devices. Whether your portfolio can last the rest of your life will depend on your budget as well as your income. As long as you can build a long-term Roth portfolio that beats your spending, it will last. For an average family, your combined income should be more than enough. For your family, it depends on you.
Finally, retirement brings its own set of risks and issues to watch out for. Among others, keep an eye out for these three specific problems:
For retirees, inflation is a biggie. Even at the 2% Federal Reserve rate, prices double roughly every 30 to 35 years. This can fluctuate significantly, and almost entirely unpredictably. So it is important to prepare for it. This is even more important if you live in a city, and absolutely urgent if you rent, since these circumstances generate much higher than average inflation.
Social Security benefits receive an annual inflation adjustment. Your portfolio is another matter. Make sure you invest appropriately, trying to get at least enough growth to keep up with inflation. It is particularly appropriate if you invest in high security assets such as bonds and annuities, which have a low or no growth rate.
Sequence risk is when you have to sell the asset during a falling market. For pensioners, this is a danger. If the market declines, but you depend on the sale of assets for income, you may be forced to choose between taking a loss or cutting your income.
This can be managed with good financial planning and the right investments, but you need to plan ahead. Don’t discount the sequence risk, otherwise it can cost you.
Health problems in retirement can take many forms. As mentioned above, be sure to plan for additional costs in retirement, as your medical needs generally increase as you age.
You should also make sure to plan for more significant medical needs such as home care, residential care and dementia. This can be managed by planning such as proper insurance and living wills, and it is important to do so.
By allowing you to collect money tax-free, a Roth IRA effectively increases your retirement income, potentially greatly. With $1.2 million in their Roth portfolio at age 60, a family would be in a good position for a comfortable retirement ahead.
Health is often one of the biggest cost surprises for retirees. Between care costs and insurance costs, medical problems can involve a lot of new expenses that you have not fully prepared for. So let’s start preparing for it now.
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Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuation like the stock market. The opposite is that the value of liquid assets can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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