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.

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Canadian Equivalent of the Roth IRA - The Tax-Free Savings Account, or TFSA | MoneyEnergy
April 24, 2009 at 3:23 am


chris.pund April 22, 2008 at 7:45 pm

You say the max is $5,000 is there a minimum? If I can’t afford to do the $416.67 per month, what is the lowest that I can go without any kind of penalty. Or can you go without putting anything in for a year or two, not that you would want to do that. Just curious, I’m not completely familiar with the way the Roth works. Thanks Kevin!

Mike April 23, 2008 at 2:26 pm

Roths are great, and I agree that they are an excellent way for many people to save. One addition to what you wrote is that anyone making more than $116,000 per year ($169,000 for couples) cannot contribute to a Roth (those are the 2008 limits). I know that sounds like a ton of money, but “middle-class” is now defined as households making less than $200,000 per year, so a lot of families do miss out on being able to use Roths.

Also, there are no guarantees that the government won’t tax the gains in the future, that’s just the law currently in effect.

Tom April 23, 2008 at 3:17 pm

While 1.2 Million might sound like a lot right now, I doubt that you will be able to live comfortably of the income it will produce when you reach 66. This is due to inflation. If you figure inflation at 3% you will only net 4% per year. If you put 4% per year into your calculator you will get a picture of what you will have in today’s dollars when you retire. The amount it produces is 545,000 Now take 4% of that a year (the other 3% will need to stay in the account to hold the purchasing power for the continued inflation you will experience) and you get 21,800 per year; a nice supplement to social security for sure, but hardly enough to consider yourself rich.

I commend you for taking an early interest in your retirement, but you may want to either contribute more over the years or go for a higher rate of return. At your age I would suggest being more aggressive up front and scaling back as you grow older and your nest egg grows. Many of the targeted date mutual funds do exactly that and may be a good choice for you.

Kevin April 23, 2008 at 4:04 pm

@Tom: Well, I’ve heard this type of argument before. I can’t take into account every different little fact — even inflation. This is just a model. I’m not berating you — I enjoy the dialog, so let me explain.

I’ll go back and edit the post, or write a follow up, that takes into account inflation.

However! If you contribute the -equivalent- of $5,000 per year each year, then at the end you will end up with the -equivalent- of $1.2 million.

So year 1 = $5,000
year 2 = ($5,000 x 1.03) for 3% inflation = $5,150
year 3 = $5,304 ($5,150 x 1.03)
etc. etc.

In the end you end up with a bigger number, but its equivalence is $1.2 million in today’s dollars.

Dave April 29, 2008 at 10:20 pm

Your inflation adjustment isn’t quite right. I modified your spreadsheet to increase the contribution by 3% each year and then converted the end result into today’s dollars and I came up with the same result that Tom calculated using a return of 4% ($545k). A return of 10% will get the post-inflation adjusted rate you are looking for.

Feel free to plug these equations into your spreadsheet if you aren’t convinced:
In E1, enter 0.03 as the inflation rate
In D9, replace your equation with “=D8*(1+$E$1)” to increase the contribution by 3% each year, and copy that equation down to the bottom.
In I8, type “=H8/((1+$E$1)^(B8-$B$8))” which will give your ending balance in today’s dollars and copy down.

You’ll see the final result is $544,711.70 for an interest rate of 7% and an inflation rate of 3%. This is approximately the same value you get if you use an interest rate of 4% and an inflation rate of 0%.

I agree with John that this is a great start, but it should be supplemented with additional retirement savings, like taking advantage of the company’s match on a 401(k). I appreciate the advice you are giving. I’m afraid that when people in their 20s and 30s reach retirement age, a lot of them are going to wish they could go back and start saving aggressively as early as possible.

Financial Course Blog September 3, 2008 at 8:48 am

Your calculations are very true and that’s the basis to creating your retirement fund. I really would wish more people start saving more instead of getting into debt more…


Tom September 9, 2008 at 12:10 pm


The point of my earlier post was not to question your calculations, it was to change your mindset about how to invest while you are still young. I believe the largest mistke in retirement planning is to be too conservative early on and as a result too agresive later on.

Also; I am not a fan of the ROTH IRA. You are giving up a tax break today for the promise of a larger one in the future. I have seen the government break too many promises in the past to blindly trust them on something as important as my retirement future. I will take my tax breah now with a traditional IRA! thank you very much. After all a bird in the hand is worth two in the bush. Young people, instead of singing its praises, should recognize it for what it really is. It is a way to collect tax revenues today at the expence of future revenues. So the babyboomer club (of which I am a member, sorry!) are not only running up a huge deficiet you will have to deal with, but are collecting tax revenues today at the expence of your tax revenues tomorrow.

GHolmes September 17, 2008 at 4:21 pm

Kevin you rock with this post (too bad you are a Vols Fan). This summer my 15 yearold got a summer job and we will open a ROTH IRA which I will match his savings. 7% is very measly return over a lifetime of a mutual fund. If my son invests 2k a year for only 10 years with a 13% lifetime return he would have more net worth at my age than most of my peers. By the time he hit 59 1/2 he would be over $2m

Ken January 18, 2009 at 7:29 am

I have a Roth IRA and am a big advocate of them. I wish I’d known this when I was 24. I am enjoying your info here…great stuff!

MoneyEnergy April 23, 2009 at 9:58 pm

Nice post, this is my first time on your blog. I think the equivalent to the ROTH IRA in Canada is our new “TFSA” appropriately labeled, “tax-free savings account.” You can contribute up to $5,000/year of after-tax dollars which not only grow tax-free but you can also use them tax-free whenever you withdraw from it. No penalty for withdrawing, either.

I started investing at age 22, but as a student didn’t have $400/month for it, that’s for sure… I’m still not investing the equivalent of that much per month, but trying to up this figure (and still a student – grad student!).

Buddystips September 8, 2009 at 8:51 pm

I think the best thing in all the dialogue related to this post is JUST DO IT!!! Start saving in a deferred program and add to it each year until you maximize it out, then repeat each year there after. No one should be dependent on one source of retirement income, so diversify your investments and if you are fortuniate enough to have a retirement program at work, work with that too. Good discussion…

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