One Easy Step to Retiring with $1,000,000

by Kevin on April 22, 2008

I’ve got a keen interest in learning more about how changing one thing in your life can have a huge impact further down the line. More on that in the future.

The Roth IRA is one of those changes. One simple decision that can truly change your life.

The government allows you as an individual to set aside $5,000 (as of 2008) per year of after-tax money for your retirement. I decided to use the Roth for this example because it eliminates taxing gains on your investment, which makes the example a lot more simple.

So what happens if you start early and set aside just $5,000 per year?

Let’s run the numbers.

Using Excel, you can calculate what amount of money you would end up with based on the following criteria. I’m using myself as an example because, well, I know everything about me.

  • Age: 24
  • Retirement: 66 (I would rather retire earlier than this, but am willing to work this long)
  • Annual Contribution: $5,000 after-tax dollars
  • Annual rate of return: This can vary greatly. We’ll stick with a very conservative 7% per year.

You can make changes and run your own calculations with my Roth IRA calculator (in Excel).

Long story short? If you start early, you can retire as a millionaire by just using one investment vehicle. No need for five different accounts with three different brokers. A simple Roth that through whatever investments you chose earns 7% per year, nets you $1.2 million (give or take some due to rounding error). You can see a chart of your cumulative contributions compared to the balance in the account. See how much you are earning at the end without having to put more money in — the beauty of compound interest. (You can click on the chart to see the full size.)

Roth IRA Chart

For those who like easy steps:

  • Pay off debt, live a debt free life.
  • Commit to putting away $5,000 after-tax money into a Roth IRA. That’s $416.67 per month.
  • Invest in index funds like Vanguard’s Total Stock Market, Total International Stock Market, and Total Bond Market. Lower fees = higher returns.
  • Earn a ‘measly’ 7% return on your investments each year until retirement.
  • Retire with $1.2 million.

Want to run your own numbers? I’ve uploaded the handy Excel workbook for you.

Update: I answered a question from the comments below in a different post. It addresses Roth IRA minimums.

Comments on this entry are closed.