The importance of setting yourself up for your Golden Years should not be overstated. Even if you think you’ve left it too late – think again. While you should consider putting some of your hard earned cash into an individual retirement account (IRA) at an early age, the next best time to get started is NOW.
However, trying to estimate how much you are likely to save for your retirement via an IRA is not easy. You need to consider a range of factors such as your annual salary, how many years you’ll be saving for, what age you’re likely to retire, and of course – your starting balance.
To make things a lot easier for you, we’ve created an IRA calculator. Simply enter the required figures into the calculator below to get an idea of your projected savings.
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What to consider when using the IRA calculator?
The IRA calculator is a lot more complex in comparison to other areas such as savings bonds or stocks and shares, as there so much more to consider. Due to the sheer length of the time you’ll likely be saving for, a lot can change over the course of the IRA. Check out some of the most important things to consider when using the IRA calculator
When you first get yourself set up with an IRA, you will be required to deposit a lump sum. While this could be as low as $100, you might instead be sitting on a larger cash balance that you want to invest straight away. Essentially, the more than you start with, the faster the rate that your IRA will grow. If at all possible, you should consider trying to invest as much as possible at the start for this very reason. You can play around with the IRA calculator by seeing what impact the starting balance can have on your expected retirement amount.
The amount that you invest into your IRA on a regular basis is equally as important as your starting balance. After all, you are likely going to be saving money for decades, so if anything, the amount that put away throughout the course of the IRA is probably more important than what you start with. On the other hand, it is extremely difficult to know what your circumstances will be further down in life.
While at present you might be able to commit to a certain amount at the each of each month, this might not always be the case. Equally, it’s likely that as you progress through your career, your income will increase, and thus, you’ll be able to put more into it. This is why you should always re-visit the calculator if and when your financial circumstances change.
You also need to consider your age, as well as the age that you plan to retire. This is important because it will dictate the length of time that you are planning to save for. While entering your current age is straightforward, attempting to ascertain when you are going to retire is near-impossible. As such, when you enter your projected retirement age, make sure you remember that you could retire sooner, or even later.
Expected Tax Benefits
One of the key benefits to investing in an IRA is that you will be accustomed to a significant number of tax benefits. While the amounts you can save are easy to calculate now, there is no guarantee that these rates will remain constant throughout the duration of your IRA. In fact, it is almost certain that this will change at some point, so do bare this in mind. As the tax breaks available via an IRA are often based on your annual income, you also need to make some considerations regarding your future expected earnings.
Glossary of Retirement Terms
The Individual Retirement Arrangement (IRA) is a tax-advantaged investment account specially designed to help you save for retirement. There are different types of IRAs including traditional IRA, Roth IRA, and SEP IRA and they have their primary difference in the treatment of tax.
Roth IRA is a tax-advantaged retirement savings/investment account. It differs from traditional IRA in the sense that contributions into the Roth account are taxed but future incomes from savings or Roth IRA investments are tax-free.
A Traditional IRA is a tax-advantaged savings/investment account suitable for individuals looking to reduce their tax bill today. Contributions into a traditional IRA are tax-exempt but future earnings from the utilization of the IRA funds are taxable.
A Simplified Employee Pension IRA is a traditional IRA alternative offered by businesses to their managers and employees. It is a tax-deferred savings/investment account implying that contributions to the account are tax-exempt but future earnings are considered taxable incomes. They have higher contribution limits compared to traditional IRA and one can contribute a maximum of $57,000 into a SEP-IRA for the year 2020.
401K is an employer-sponsored retirement savings plan that lets employees save and invest a portion of their income in readiness for retirement. It’s a tax-deferred plan implying that contributions are tax-exempt. For every dollar you invest, the employer matches it with an equal contribution and you can contribute up to 3% of your income.
403(b) is a retirement plan that’s specially designed to cater for employees in public schools and universities and other not-for-profit organizations like hospitals and religious groups. One can deposit up to $16,500 per annum into the 403(b) plan. The primary difference between the 401k and 403(b) is that the latter carries less administrative costs.
Rollover IRA is a special account set up to help you move your employer-sponsored retirement plan into an individual IRA without incurring withdrawal fees and taxes. Ordinarily, moving funds from an old IRA to a new one is considered a withdrawal and attracts penalties and current taxes. The IRA rollover helps you maintain the tax-deferred status and avoid penalties when switching IRA plans.
SIMPLE IRA is a special type of employer-sponsored retirement plan designed for use by small businesses with less than 100 employees. The SIMPLE IRA carries fewer administrative costs and is generally less expensive than the 401K plan.
An annuity is an insurance or investment plan that pays you a regular fixed income at different intervals (monthly, quarterly, annually) for the rest of your life. A good retirement plan, for instance, should be enough to buy you an annuity that gets you sufficient and steady monthly incomes for the rest of your life.
Equity release is the form of surrendering the equity/value of a capital asset (usually your home) to a financier in exchange for a lump sum cash advance or a steady stream of income. You, however, get to retain the utilization of the home with the financier claiming it upon your death.