SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Planning for a Roth IRA slightly different to most other retirement assets. This tax-advantaged account produces completely untaxed income, as long as it effectively boosts the value of your Social Security withdrawals and benefits.
That changes your options compared to getting pre-tax 401(k) or another non-Roth account.
For example, say you have $1.2 million in a Roth IRA at age 60. The good news here is that, overall, you're in a pretty good position. You probably don't need to do much to ensure that this portfolio produces a comfortable income in retirement, but it all depends on your personal circumstances.
Here's how to think about it, and you can also get matched with a talk to a financial adviser about your personal situation.
Retirement income for most households is a balance of portfolio earnings and Social Security.
First, Social Security. Without knowing more, let's assume average benefits, which in 2024 amount to $22,884 per year ($1,907 per month). Since the rest of your income comes from a Roth account, you only calculate taxes based on those benefits. Taxes on these benefits will depend on how much other income you have, but you can expect 0%, 50% or 85% of your benefits to be taxed.
From there, we can look at your Roth IRA.
Most of your portfolio income will depend on your personal investment and retirement situation. For example, let's say you plan to retire at full retirement age of 67. This gives you another seven years of portfolio growth for an already solid Roth portfolio. How much you have in this portfolio at retirement (and, consequently, your total income) will depend a lot on your investment choices and risk tolerance.
For example, let's say that for the next 7 years you continue to contribute 10% oa median US Income ($7,500 per year in contributions). Based on your investment choices and rates of return your portfolio may grow to:
S&P 500 Average (10%, High Volatility) – $2.4 million by age 67
Average Balanced Portfolio (8%, Moderate Volatility) – $2.12 million by age 67
Average Corporate Bond (6%, Low Volatility) – $1.86 million by age 67
Current 10-Year Treasury Bond (4.63%, Lowest Volatility) – $1.7 million by age 67
At a 4% withdrawal rate, starting at age 67, each of these portfolios could produce an annual combined income (portfolio and Social Security) of:
S&P 500 – $118,884
Balanced – $107,684
Corporate Bonds – $97,284
Treasury Bonds – $90,884
Or, alternatively, you could invest in an annuity. Say you put your entire $1.2 million Roth IRA into an annuity right now, with a payout date seven years in the future. A representative a lifetime annuity could provide $137,856, with a combined income of $160,740. Although higher than any of your other options, unlike portfolio income your annuity payments are unlikely to adjust for inflation.
From there, the good news is that we can stop the analysis. Since this is a Roth IRA, your income will be entirely after-tax. So we can assume that this income is complete as it is. What's more, you won't have to plan for it RMDs or other tax related matters. In other words, these are the numbers you have to work with.
Need help crunching your own numbers? Be matched with a financial advisor for free.
In all cases, even at a Treasury bond rate of 4.63%, by age 67 your portfolio can generate income that is significantly above the median. In fact, depending on your investment strategies during your retirement, you may be able to collect even more than our assumed income.
However, the question is whether this portfolio can generate enough money to last you the rest of your life, not the median lifetime. That depends entirely on your personal expenses, which means budgeting for your spending. Among other issues, consider:
Housing Costs: Do you own your own home or rent? If you own, how much does it cost to maintain, insure and otherwise keep your house up? If you rent, what kind of increases should you expect?
Medical Expenses: Medical and insurance costs are especially high in retirement. Make sure you budget for out-of-pocket expenses, gap insurance, long-term care insurance and other needs.
Lifestyle Expenses: Do you like to travel? What kind of hobbies do you have? Do you eat out? In general, what kind of lifestyle do you enjoy and what does it cost to maintain?
Estate Costs: Do you have any specific estate wishes for them (hopefully many) later? What would you like to leave behind, and what kind of assets will be needed?
Basic Expenses: Finally, what are your basic bills? In other words, in addition to housing, what is your bottom line for each month?
All these issues are specific to your personal situation. They are also unfavorable. Whether your portfolio can last you for the rest of your life will depend as much on your budget as your income. As long as you can build a long-term Roth portfolio that beats your spending, it will last. For a median household, your combined income should be more than enough. For your home, that's up to you.
Finally, retirement comes with its own set of risks and issues to watch out for. Among others, keep an eye out for these three specific issues:
For retirees, inflation is biggie. Even at the Federal Reserve's 2% target rate, prices roughly double every 30 to 35 years. This can vary significantly, and is almost entirely unpredictable. So it is important to prepare for this. This is even more important if you live in a city, and absolutely urgent if you rent, as those circumstances produce much higher than average inflation.
Social Security benefits receive an annual inflation adjustment. Another thing is your portfolio. Make sure you invest appropriately, trying to ensure at least enough growth to keep up with inflation. That is particularly appropriate if you are investing in high security assets such as bonds and annuities, which have low or no growth rates.
Continuation risk is when you have to sell assets during a down market. For retired people, this is a danger. If the market declines, but you rely on selling assets for income, you may be forced to choose between taking a loss or cutting your income.
This can be managed with good financial planning and the right investments but you will need to plan ahead. Don't underestimate follow-up risk, otherwise it can cost you.
Health issues after retirement can take any number of forms. As noted above, be sure to plan for additional expenses in retirement, as your medical needs will generally grow as you age.
You should also ensure that you plan for more significant medical needs such as home care, residential care and mental decline. This can be managed through planning such as appropriate insurance and living wills, and it is important to do so.
By letting you collect money tax-free, a Roth IRA effectively increases your retirement income, potentially significantly. With $1.2 million in their Roth portfolio by age 60, a household would be well positioned for a comfortable retirement ahead.
Health is often one of the biggest unexpected costs for retirees. Between care costs and insurance costs, medical issues can mean a lot of new spending that you may not be fully prepared for. So let's start preparing for that right now.
A financial adviser can help you build a comprehensive retirement plan. Finding a financial advisor doesn't have to be difficult. SmartAsset's free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your match advisor to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, start now.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuation such as the stock market. The trade-off is that the value of liquid money can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about AMP SmartAsset.
