If you are looking to use your ROTH IRA as a retirement vehicle, but don’t have a huge balance, this post is for you! A Roth IRA, can be a powerful vehicle to not only accumulate property, but also do it in a manner that saves you money in the long term with the IRS.
Some people gain this knowledge and foresight when they are young and work diligently to invest in their retirement accounts and retire moderately wealthy. Others come to this conclusion much later in life and often have very little to put toward their Roth IRA balance each year.
Guess what? Any contribution to your retirement account is a good contribution. Your account is definitely going to grow, but depending on how late you start and how little you invest each year, it might grow a little or it might grow a lot. But once you put the power of compound interest on your side, you’ll have no trouble building a comfortable nest egg to have available during your retirement.
How Will Compound Interest Help Grow Your Money Faster?
There are many wonderful things about investing in a Roth IRA, but the growth potential is definitely the greatest among all of them. Your account is going to grow and continue to grow as long as it exists. It will even continue to grow during the years where you don’t make a contribution at all. But contributing each year will help it grow faster and bigger in a shorter amount of time.
How does it continue to increase at such a wonderful pace? It increases this way because of the magic and power of compound interest. In a nutshell, compound interest happens because with each year you contribute, it’s going to gain interest and increase your balance. And even if you don’t contribute, the existing money in your account will continue to gain interest and also increase your balance.
You can stop contributing to your Roth IRA in its entirety and your balance will continue to increase due to compound interest. The excellent thing about compound interest is it’s earned on the interest that you earned the year prior, whereas simple interest is interest earned only on contributions. Simple interest is nice but compound interest will change your life!
An Example of Compound Interest in Action
Let’s say you’re starting to contribute to your Roth IRA very late in life. You’re 45 years old and you realize it’s time to finally begin building your retirement nest egg. But you barely make enough to cover the bills, so your contribution will only amount to $2500 per year.
This might not seem like a lot by the time you hit retirement age of 65, but you’re going to be pleasantly surprised. You see, if your Roth IRA account accumulates 8% interest annually and you contribute $2500 per year for the next 20 years, your $50,000 investment over a 20 year period will be worth $114,404.91.
Do you see what happened here? You earned nearly $65,000 on your small $2500 investments that you made over a 20 year period. You more than doubled your money and you may not be rich in retirement, but you have a halfway decent retirement nest egg to help supplement your Social Security as you move toward retirement age.
In another scenario, let’s say you’re capable of doubling your contribution to $5000 per year. Well, as you can imagine, your $100,000 investment will become $228,809.82 by the time you retire. Just adding the extra $2500 per year will allow you to gain almost an additional $65,000 to enjoy during your golden years.
Personally, I like to own companies that pay dividends in my portfolio, but to each, his own. I’m also someone who believes everyone should at least examine opening a gold IRA.
3 Ideas to Increase Your Contributions
Believe it or not, there are simple things you can do to earn extra money without disrupting your life too much. Some of these are outlined in the post I wrote about a 24 year old who gave investment advice. Some suggestions include:
- Become an Uber or Lyft driver – the average driver makes about $13 per hour. If you work an additional eight hours a week as a driver, you’ll have an extra $5000 per year to contribute toward your retirement.
- Become a freelancer – depending on your specialty, you could make anywhere from $20 an hour to $50 an hour or more selling your services online. This will only require one to five hours a week of your time to earn $5000 by the end of the year.
- Perform odd jobs – start mowing lawns during the summer and shoveling snow or plowing driveways during the winter. You can make anywhere from $10 an hour to $20 an hour or more depending on your specialty and you’ll only need to work a handful of hours a week for 50 weeks to make this additional money.
Clearly, contributing to your retirement is definitely a good thing. Take the necessary steps to open up a Roth IRA account now and begin contributing right away even if it’s only a small dollar amount.
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started this website to share his expertise in using his Self-Directed IRA. Most recently he's been advising individuals to diversify into precious metals ahead of a certain recession. He invested with Goldco.