On the Roth IRA website, it states that six out of ten workers feel confident or somewhat confident about their ability to enjoy the kind of retirement that they desire. This is good news, as all too often, those in the workforce that are nearing retirement do not place enough emphasis on planning for the later years in life. The need to plan for retirement is real.
- The average life expectancy is on the rise
- Your body might not let you work forever
- You can't assume your family will be there to care for you
According to data reported by USA Today, a baby born in 2016 in the United States is expected to live 78.6 years on average. This is an increase of seven years over that of a baby born in 1980. Those living in Hawaii have the longest life expectancy with those in Mississippi, the lowest.
As you age, it is inevitable that you will begin to slow down, and tasks that were easier to handle in the past will become increasingly difficult, if not impossible. There are mixed studies out there with some suggesting that working in the later years is good for maintaining cognitive function, mental health, and physical function, but other reports show that working in later years can have serious adverse health consequences.
While we can hope that our children (if we have any) will care for us when that time in our life nears, it is unrealistic that they will be able to care for us full time, or that they will be able to handle our daily medical needs, trips to the doctor, etc. With young families working more and more and free time at an all-time low, it just isn't realistic now to assume that you'll be able to move in with and financially depend on your loved ones.
Thus, putting a plan together to ensure you can live the lifestyle you want during retirement is critical. And Roth IRA accounts are a great option for those looking to invest in their end of life years. A Roth IRA, if you are unfamiliar with the concept, is a retirement savings account that you can establish in order to grow your money without a tax penalty. Roth IRAs are funded with after-tax dollars which means that you have already paid the taxes on those funds. This means that at retirement, you can pull funds out of the account without worrying about additional costs.
If you are familiar with a traditional IRA, it is important to note the difference, as Roth IRAs offer a bit of additional flexibility. As mentioned, you can take out your money at any time athough you may be subject to penalty for withdrawing earnings before age 59 ½ unless for a qualifying reason.
With a Roth IRA, you can leave your money untouched, often called "hands-off investing" but with a traditional IRA, you must start making withdrawals after you reach age 70 ½. Traditionally, you cannot continue to contribute to your IRA account once you have reached seventy years of age but you CAN continue to contribute to your Roth IRA.
Your Roth IRA will begin to grow from the day you make your first deposit, and it will continue to grow over time due to continued contributions, and earnings. Your fund will also grow, inevitably, due to compounding interest. To set up an investment goal, follow these steps:
- Determine how much monthly income you will need during retirement.
- Estimate your expected monthly social security benefits and any other benefits you will receive (such as whole life premium payments, pensions, etc.).
- Estimate your life expectancy. This calculator from the Social Security Administration can show you the average number of additional years that someone can expect to live based and gender and year of birth. If you are superstitious and don't want to try the calculator, here are a few examples that have been calculated already.
- As of mid-2019, a female born in 1985 can expect to live an additional 51 years. A male born in 1985 can expect to live an additional 47 years.
- As of mid-2019, a female born in 1975 can expect to live an additional 41 years. A male born in 1975 can expect to live an additional 38 years.
- As of mid-2019, a female born in 1950 can expect to live an additional 18 years. A male born in 1950 can expect to live an additional 18 years as well.
- Determine the estimated rate of return. The long-term ROI on the stock market is approximately 8% and you can expect a lower rate of return on your contributions after you retire.
- Account for inflation. The calculators provided below will account for this, but if you are using a different calculator or calculating on your own, use 3.26% annual assumption for inflation, and adjust the marginal tax rate based on the income figures used.
- To see how your Roth IRA can grow over time, check out our Online Roth IRA Calculator.
So how do you open a Roth IRA account? This Money Under 30 website provides a list of the best Roth IRA accounts for 2019. It's not too late to plan for your retirement, and this article from Dave Ramsey provides three reasons why you should get started now. Ramsey explains that your golden years can still shine and there are many ways to stretch your retirement dollars. And if you are planning to retire this year, this article from TheStreet provides some great tips for 2019 retirees. PS… congratulations!
