You should invest at least $2,000 a year in a Roth IRA for the following reasons. You never pay taxes when you withdraw the money, don’t have annual required minimum distributions when you reach 72 years old, and finally, Roth IRA earnings are never taxed. If you start contributing these amounts in your early twenties and investing in ETFs, the IRA should grow to over a million dollars by the time you retire at age 70. The US stock market has returned on average over 8% for the last 200 years, see the table below (starting contributions at age 22, and continuing until age 70 in the table).
Some investment research companies such as Zacks Investment Research are advertising that they have earned a 24% return over many years. If you were able to do this over the entire period covered below at 24% see results. I doubt you would be able to do this, but it shows the power of compounding. I have also averaged about a 12% rate of return since I have been retired for 18 years so I also included that below in the table.
Age 32 42 52 62 72 82
IRA Value @8% $30,132 $95,185 $235,629 $538,830 $1,189,116 $2,567,211
IRA Value @12% $37,203 $152,751 $511,625 $1,626,23 $5,083,544 $15,788,717
IRA Value @24% $44,047 $449,440 $3,933,564 $33,877,602 $291,244,393 $2,502,906,351
This table shows the power of compounding, the total contribution would be $98,000. The average person would pay approximately $18,000 in taxes on these contributions.
You would have taxable required minimum distributions in a regular IRA at age 72 of approximately $48,000 and pay taxes of $7,200. Also, up to 85% of your Social Security could be taxable. In addition, if you had other income you could also move into a higher tax bracket. In just two years you could pay approximately as much tax as you would have paid on all the contributions. There are income restrictions on contributions and age limits on conversions to Roth IRAs. You need to make certain you qualify to invest in Roth IRAs.
Depending on interest rates, investing in preferred shares could accomplish similar returns with less risk and volatility, if you settle for the 8% return per year. There are risks and volatility in the stock market, but this can be mitigated by understanding the graphing of stocks, the Federal Reserve System, and the Economy, see an investment plan for additional information. By investing in individual common stocks and stock options instead of ETFs it is possible to earn higher returns but with more risk.