I expect you heard this advice from a family member, professor or mentor at the beginning of your career— start saving for retirement as early as possible. That means you and that means now.
It’s not that complicated, there are mind blowing rewards for starting early and you don’t have to be an investment guru to be successful.
A Roth IRA is the best retirement savings vehicle for the early stages of your career. Why… because you’re going to be a high wage earner which will eventually disqualify you from future contributions.
Based on IRS rules for 2015, you can no longer deposit money into a Roth account after your individual income reaches $131,000 a year or $193,000 for a married couple.
So if I’m guessing right—you may be able to contribute to a Roth IRA for 5-10 years before your income level forces you into another tax-deferred plan such as a traditional IRA or 401K plan.
So what happens to your Roth IRA after you can no longer contribute? Two great things.
You get to keep it and if you make sound investments, you get to watch it grow.
Let me walk you through a simple savings plan and show you the long term rewards.
I know you’re just getting started in your OD career and money is tight— but let’s say you can make a few sacrifices and set aside $100 a month. You save that amount for 6 years putting $7,200 in your account before your income level knocks you out of the program.
Before I go any further, let me emphasize this is just the beginning few years of your retirement savings plan. You need to set aside retirement money consistently and much more aggressively in future years.
Your $7,200 investment with a 7% annual return has already grown to $9,184.83. Now, you keep that money untouched a Roth IRA, adding no additional money over the next 40 years while continuing to average a 7% annual return on investment (that’s in-line with historic long-term gains for the stock market.)
Somewhere between the ages of 65-70 you decide withdraw your money for a dream vacation.
Well get ready to see the world because you’ll withdraw $137,538 TAX FREE.
Here’s a few beautiful facts about your Roth earnings:
- Because you invested with post-tax dollars you won’t pay one cent of tax on that $100,000 of profit. If you would have followed the same savings program with a traditional IRA or 401K, you’d be on the hook for ordinary income taxes on the entire amount.
- You can take out the money any time you want after age 59 ½ with no penalty. You can take all of it or part of it.
- You are not forced to take minimum distributions at any age. With a traditional IRA or 401 K you must start withdrawing and pay taxes on a percentage of your savings after age 70 ½ or pay substantial penalties.
Now, let’s say you save like crazy early in your career and manage to make the maximum allowed contribution of $5,500 dollars annually for those first six years.
In 40 years— your initial $33,000 investment (now $42,097.12 with a 7% annual return) will grow to $630,381 TAX FREE.
I’d start off with a few stocks of high quality emerging companies that have a good chance of lasting the next 20-40 years. Go with best of breed, quality names that you recognize as industry leaders. As your other retirement accounts and overall wealth grows, I’d encourage you to speculate a little more in your Roth account.
Nothing wrong with setting aside a small percentage of your funds to try and score big on a few hot emerging companies.
Let’s take Netflix as an example. From 2010 to 2015 the stock price increased 350%. Remember, we’re talking about tax free profits in your Roth IRA.
If you’re deeply interested in the equity markets and want to make your own investment decisions you can open an on-line Roth IRA account at TD Ameritrade, E Trade or many others (although as your career progresses and you build more wealth, I highly recommend you hire an investment advisor.)
If, like most busy professionals, you don’t have the time or inclination to follow the markets daily and diligently research each of your investment ideas, then consider working with a Registered Investment Advisor (I happen to know one.) Send me an e-mail if you’d like to explore getting started.
Imagine how much future wealth you can build by making a few simple sacrifices now. How about something easy like skipping an expensive cup of coffee once or twice a week? Yes, it will cost you something to get started now— but it will cost you more if you don’t.
Dana Beards | Registered Investment Advisor | Desert Capital Management Group
Dana Beards is a Registered Investment Advisor with Desert Capital Management Group in Sacramento. Previously he worked in University and Student Relations for VSP and helped to establish and grow student business clubs at all the colleges of optometry. The clubs support and encourage optometry students who aspire to be small business owners. Dana continues to serve as Executive Director of Solution, a 501 C3 organization that support leaders of the student business clubs at all 21 US Colleges of Optometry. His email address is firstname.lastname@example.org.