In this article I’ll walk you through how to use a Roth IRA Calculator while pointing out the benefits of this awesome tool along the way. Let’s dive in.
What is a Roth IRA Calculator?
It’s a tool that helps you estimate what your Roth IRA account balance will be when you retire, based on different factors like how much you plan to contribute to the account over time.
Why Should You Use One?
You can figure out how much to invest in your Roth IRA right now and estimate what the future reward will be when you retire. It’s also incredibly powerful to see how variables like age and yearly contribution amount will impact your returns.
Let’s Get Started
Google “Roth IRA Calculator” or select Thrivent’s Roth IRA Calculator. All Roth IRA calculators take into account the same factors, but I like this one because the view is more compressed so you can quickly see all of the results when you manipulate the numbers:
Calculator Layout
Top Bar = Estimate of how much you will have in your Roth IRA based on all of the variables
Middle Section = Variables you will input like age and how much you’re going to contribute. This is the most important section.
Graph = Visual representation of your Roth IRA account balance vs. a regular taxable account balance using the same variables. Note: a taxable account is not the same as a traditional IRA.
Definitions = Breakdown of the calculator components and variables. Watch out for calculators with outdated tax brackets and yearly contribution amounts.
Using the Variables
Starting Balance:
This is how much you’re going to deposit into your Roth IRA when you open the account. For most people this is how much you’re going to transfer from your checking or savings account into your Roth IRA. If you have an old employer 401k you can also use that money as your starting balance.
Go ahead and put a number in. For my example, I’m putting in $1,000.
Annual Contribution
This is the total you will contribute each year until your retire. I think in terms of monthly amounts first in order to understand my annual contribution.
If you’re comfortable contributing $200/month into your Roth IRA, then you can figure out your annual contribution if you multiply by 12.
$200/month x 12 months = annual contribution amount of $2,400.
Current Age
Enter your age. For this example, I’m using 25.
Age at Retirement
For most people this will be around 65. Put in whatever number makes sense to you, but don’t use a number lower than 60 because you’re allowed to start withdrawing from your Roth IRA penalty & exception free at age 59 ½.
Expected Rate of Return
This is how much money you expect to make from your investments, expressed in a percentage. For example, if you invest $100 and get $110 dollars back, then your rate of return is 10%. You’re making 10 dollars for every 100 dollars you invest.
Stock market returns can vary widely from year to year, but over time the historical rate of return hovers around 7-8% once you take into account inflation. I use 8% in my estimates. If you want to be more cautious, use a lower number; if you want to be more optimistic, use a higher number.
See Investopedia’s breakdown of Average Annual Return for the S&P 500.
Marginal Tax Rate
This number factors into the taxable savings portion of the graph. It’s the percentage of tax that you would pay based on your tax bracket if this was a taxable account. Remember, you don’t have to worry about taxes on withdrawals for a Roth IRA so this number is just here just to show you how great a Roth IRA really is.
For my example, I’m using 22%. If you want to know what tax bracket you’re in google “Current US Tax Brackets.”
Total Contributions
This totals up how much money you will contribute toward your Roth IRA over the lifetime of your account. In my example, the total contribution amount is 96,000.
Maximize Contributions
When you check this box, the calculator will change your annual contribution amount to the maximum allowable limit (6k until age 50 and then 7k from 50 until retirement). Make sure to check this box at some point in your exploration to see the impact of maxing out your Roth IRA.
The Results
$693,199 when I retire!
Is this for real?
YES. In the example above, I’m able to achieve this result if I open a Roth IRA right now and then contribute $200/month to it until I retire. These numbers are absolutely possible by using low-cost, simple long term investing strategies.
Use your Roth IRA calculator to manipulate the variables and see for yourself how your account balance will increase if you just put another $50 a month into your Roth IRA. Or if you start your Roth IRA Right now instead of waiting 5 more years. Better yet, see what happens when you max out your annual contributions (go ahead and check that maximize contributions box).
My account estimate jumped to $1,729,735.
Insights
- One of the biggest factors in investment success is the amount of years you have until retirement. Open your Roth IRA RIGHT NOW so you can start taking advantage of this awesome account
- If you’re nervous about putting a lot of money every month into your Roth IRA, remember that you can access your contributions anytime if needed. In the example above, that’s up to the total contribution amount of $96,000.
Let me know what insights you have in the comments below!
Disclaimer: I am not a certified financial advisor and this article is intended for educational purposes only