Accumulating $1 million in an individual retirement account (IRA) might seem unlikely, given the annual contribution limits. The limit has just increased to $7,000 for those under 50, up from $6,500 in 2023. However, according to Fidelity's analysis of IRA balances at the end of 2023, nearly 400,000 account owners have achieved this milestone.
These IRA millionaires didn't reach the million-dollar mark by luck. Certain strategies and habits set them apart. If you aim to follow in their footsteps, here are two key things to note.
Image source: Getty Images.
1. Your financial habits will help or hurt your retirement goals
Chances are, it will be difficult to prioritize IRA contributions if you're deep in debt and struggling to pay the bills. It's easier to save and invest when your finances are in order. Here are a few things you can do to get your finances on track:
- Create a budget: Keep tabs on your income and expenses to make sure you're not living above your means.
- Pay down debt: Pay more than the minimum balance on your credit cards, and see if you can negotiate a lower interest rate. After you've paid off all your credit card debt, make it a habit to pay off your credit cards in full every month to avoid accruing interest.
- Build an emergency fund: In BlackRock CEO Larry Fink's annual letter to shareholders, he noted that people with emergency savings are 70% more likely to set aside money for retirement. Start by saving enough to cover one month of expenses, and then continue saving to build a safety net for unexpected costs.
- Automate savings: As soon as you get paid, ensure a percentage of your paycheck goes directly into savings, preferably a high-yield savings account that you can't easily access. Also, set up automatic transfers to your investment accounts to ensure consistent contributions.
- Make consistent contributions to an IRA: Understand the rules for traditional and Roth IRAs to determine which one you can contribute to each year. If your income is under a certain threshold, you can contribute after-tax dollars to a Roth IRA and receive tax-free income during retirement. Alternatively, you can contribute to a traditional IRA and potentially qualify for a tax break in the current year if you meet the eligibility criteria.
2. Small contributions can add up over time
Traditional and Roth IRA contribution limits are nowhere near the five-figure limits of 401(k)s, but they can still move the needle. For 2024, you can stash away up to $7,000 in an IRA if you are under 50 ($8,000 if you are older). That comes out to roughly $584 every month for 12 months. If you're on a weekly contribution schedule, that would be about $135 every week for 52 weeks.
Annual contributions of $7,000 might not seem like enough to reach a million-dollar retirement. However, this is where the power of compounding comes into play. When your earnings start to generate additional earnings, your savings can grow exponentially over time.
For example, let's say you set aside $7,000 annually in an IRA for 40 years. You would have saved $280,000 in contributions. If you invest that money and earn an average rate of return near the historical average, you could be on your way to a million-dollar IRA within 30 years. The good thing about an IRA is that you have the flexibility to invest in your favorite assets, such as individual stocks and exchange-traded funds, so it's not far-fetched to achieve returns over 10%. However, it's important to note that returns could potentially go south as well.
Below are estimates of how $7,000 invested annually could grow to a million-dollar IRA, depending on your average return. If you increase your contributions as the IRS raises the limits, you could reach your goal even faster.
|
$7,000 Invested Annually For: |
Growing at 7% |
Growing at 8% |
Growing at 9% |
Growing at 10% |
|---|---|---|---|---|
|
10 years |
$103,485 |
$109,518 |
$115,922 |
$122,718 |
|
20 years |
$307,056 |
$345,960 |
$390,352 |
$441,017 |
|
30 years |
$707,511 |
$856,421 |
$1,040,027 |
$1,266,604 |
|
40 years |
$1,495,267 |
$1,958,467 |
$2,578,043 |
$3,407,963 |
Data source: Author calculations.
The secret to building a large retirement nest egg in an IRA account is to contribute the maximum amount now and continue doing so consistently. First, get your finances in order so you can contribute to your IRA and other retirement accounts with ease. Stick to good financial habits, stay educated on your investments, and eventually, you'll reach your goal.
