The Benefits of Starting a Roth IRA Early

May 8, 2008

According to a Callahan and Associates Web-based survey, individuals between the ages of 18 and 39 are most likely to open an Individual Retirement Account (IRA). These individuals recognize the importance of starting early to save for retirement.

IRA rules don’t have a minimum age requirement, so any young person who has earned income is eligible to open an IRA. Because earned income is the key to qualifying for a Roth, generally, a young adult or even a child would have to be working part time for an employer who collected taxes and reported the earnings to the IRS.

How big are the benefits of starting early? If a 19-year-old began contributing $1,500 each year to a Roth IRA, by age 68 he or she would have about $608,000, assuming an average annual return of 7%.

Money is taxed going into a Roth IRA and accrues interest until it can be withdrawn, completely tax-free, beginning at age 59 ½.  While that may be a long way off for young investors, certain withdrawals can be made earlier, including a $10,000 for a down payment on a first home.

For more information on a Roth IRA, contact First New York Federal Credit Union!

What Does It Take to Retire?

January 23, 2008

Think of those days when you can sleep in and spend the day doing whatever you want. To get there you need to plan how much money you’ll need to live on when you retire.

Your calculation will go like this (we’ve factored in a Consumer Price Index inflation rate of 3.04% per year, which has been the average rate of inflation in the 20 years from 1987 to 2006). Assume that:

1 (your estimated annual income at the time you retire) x 1.0304 (inflation factor) =
what you’ll need to maintain your current lifestyle

This shows how much you’ll need as you enter your first year of retirement. Multiply that result by the same formula to see how much you’ll need in your second year. Repeat this 15 or 20 times to see what inflation will do to your dollars over the years. The total of all those calculations–year one + year two + year three, and so on–is how much money you’ll need for retirement.

For example, if your income at retirement is $50,000 per year, you’ll need $51,520 to produce the same buying power in your first year of retirement. In year five, you’ll need $58,076; in year 10, you’ll need $64,457; in year 15, you’ll need $78,353; and in year 20 you’ll need $91,010. Over a 15-year retirement, you’ll need $961,000 in income. Over a 20-year retirement, you’ll need $1.4 million.

That’s a lot of money, but we can help you get there. Talk to one of First New York FCU’s IRA specialists for information about your retirement saving options.