Planning for a Roth IRA is a little different than most other retirement assets. This tax-advantaged account generates completely tax-free income, as long as the value of your withdrawals and your Social Security benefits are effectively increased.
That changes your options compared to having a pre-tax 401(k) or other non-Roth account.
For example, say you have $1.2 million in Roth IRA at age 60. The good news is that you’re generally in a pretty good position. You probably don’t need to do much to ensure that this portfolio continues to generate 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 and speak with a financial advisor about your personal situation.
What will your total income be?
For most households, retirement income is a balance between portfolio income and social security.
First of all, social security. Without knowing more, let’s assume average benefits, which come to $22,884 per year ($1,907 per month) in 2024. Because the rest of your income comes from a Roth account, you only calculate taxes based on those benefits. The taxes on these benefits 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.
The majority 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 seven more years of portfolio growth for an already solid Roth portfolio. How much you keep in this portfolio at retirement (and, as a result, your overall income) will depend heavily on your investment choices and risk tolerance.
For example, let’s say you continue to contribute 10% of an average U.S. income ($7,500 per year in contributions) for the next seven years. Based on your investment choices and returns, your portfolio can grow into:
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S&P 500 Average (10%, high volatility) – $2.4 million at age 67
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Balanced portfolio average (8%, moderate volatility) – $2.12 million at age 67
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Corporate bond average (6%, low volatility) – $1.86 million at age 67
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10-year government bonds current (4.63%, lowest volatility) – $1.7 million at 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:
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S&P500 – $118,884
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Balanced – $107,684
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Corporate Bonds – $97,284
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Treasury Bonds – $90,884
Or you can invest in an annuity. Suppose you put your entire $1.2 million Roth IRA into an annuity now, with a payout date seven years in the future. A representative lifetime annuity could earn $137,856, with a combined income of $160,740. Although they are higher than all your other options, unlike portfolio income, your annuity payments are unlikely to adjust for inflation.
From that point on, the good news is that we can stop the analysis. Because this is a Roth IRA, your earnings are completely after-tax. We can therefore assume that this income is complete as it is. Plus, you don’t have to worry about RMDs or other tax-related issues. In other words, these are the numbers you have to work with.
Need help crunching your own numbers? Get matched with a financial advisor for free.
What will your costs be?
In all cases, even with government bond yields of 4.63%, your portfolio could produce an income significantly above the median at age 67. Depending on your investment strategies during retirement, you may even be able to earn more than our assumed income.
The question, however, is whether this portfolio can generate enough money for the rest of your life, and not for the average life. That depends entirely on your personal expenses, which means you need to budget your expenses. Consider, among other things:
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Housing costs: Do you have your own home or do you rent it? If you are an owner, what does it cost to maintain, insure, and otherwise maintain your home? If you rent, what increases can you expect?
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Medical expenses: Medical and insurance costs are particularly high when you are retired. Be sure to budget for out-of-pocket expenses, gap insurance, long-term care insurance, and other needs.
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Lifestyle costs: Do you like to travel? What kind of hobbies do you have? Are you going out to eat? What kind of lifestyle do you have in general and how much does it cost to maintain?
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Estate costs: Do you have specific capital wishes for (hopefully) later? What do you want to leave behind and what possessions are required to do so?
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Basic costs: Finally, what are your basic bills? In other words: apart from housing, what is your profit per month?
All of these issues are specific to your personal situation. They are also enacting. Whether your portfolio will last the rest of your life depends as much on your budget as it does on your income. As long as you can build a long-term Roth portfolio that is better than your expenses, it will last. For an average household, your combined income should be more than sufficient. For your household, that depends on you.
Risks to be aware of
Finally, retirement comes with its own set of risks and issues to be aware of. Keep an eye out for these three specific issues, among others:
Inflation risks
Inflation is a major problem for retirees. Even at the Federal Reserve’s target rate of 2%, prices roughly double every 30 to 35 years. This can fluctuate significantly, and almost completely 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, because these conditions cause much higher than average inflation.
Social security benefits receive an annual inflation adjustment. Your portfolio is slightly different. Make sure you invest appropriately and try to at least achieve enough growth to keep pace with inflation. This is particularly suitable if you invest in high security assets, such as bonds and annuities, which have a low or no growth rate.
Sequence of return risks
Sequence risk is when you have to sell assets during a down market. This is a danger for retirees. If the market falls but you rely on asset sales for income, you may be forced to choose between taking a loss or reducing your income.
This can be managed with good financial planning and the right investments, but you need to plan ahead. Don’t rule out the sequence risk, otherwise it could cost you dearly.
A financial advisor can help you with your investment portfolio and risk mitigation. Get matched with a financial advisor for free.
Health risks
Health problems in retirement can take many forms. As mentioned above, you’ll want to make sure you plan for additional costs as you retire, as your medical needs generally increase as you age.
Also be sure to consider more important medical needs such as home care, residential care and mental decline. This can be managed through planning, such as good insurance and a living will, and it is important to do this.
It comes down to
By letting you withdraw tax-free money, a Roth IRA effectively increases your retirement income, possibly by quite a bit. With $1.2 million in their Roth portfolio at age 60, a household would be well-positioned for a comfortable retirement.
Retirement health planning tips
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Health is often one of the biggest cost surprises for retirees. Between healthcare costs and insurance costs, medical problems can mean a lot of new expenses that you may not have fully prepared for. So let’s prepare for that now.
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A financial advisor can help you draw up a comprehensive retirement plan. Finding a financial advisor does not 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 meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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