Want to Be an IRA Millionaire? 7 Tips All Retirees (and Pre-Retirees) Should Know

Do you want to be a millionaire by retirement? There’s a good chance you should aim for $1 million (if not more). Consider, for example, that the average Social Security benefit amounts to only about $23,000 per year (as of August) — and that relatively few people these days have pensions.

It’s up to most of us to do a heck of a lot of saving and investing for a long time, if we want to have a financially secure future. As you do so, it’s smart to make good use of tax-advantaged retirement savings accounts such as IRAs. Here are some tips for that — whether you’re far from retirement or have entered it.

Image source: Getty Images.

1. Get inspired

Let’s start with a little inspiration, because you may not find the idea of an IRA very exciting. So consider this: One of Warren Buffett’s investing lieutenants, Ted Weschler, grew his IRA from a value of $70,000 to $264 million!

Clearly, amazing results are possible. Even if you fall short of Weschler’s results, though, for example, if you only achieve 1% of Weschler’s growth, that’s $2.64 million. Just half of that would get you to $1.32 million.

2. Start early

Contribution limits for IRAs change regularly, and the limit for 2024 is $7,000 for most people, with an extra $1,000 allowed for those age 50 or older. If you start socking money away in an IRA early, you’ll be able to park a lot of money in your IRA, and it will have a lot of time to grow for you. For example:

Calculations by author via moneychimp.com.

If it’s too late for you to start early — maybe you’re about to enter retirement, for example — you might still use an IRA to build your wealth. You generally need to do so with earned income, but many people do work a bit in the early years of retirement.

3. Consider favoring the Roth IRA

One thing to know about IRAs (and 401(k) accounts, too, for that matter) is that they come in two key varieties: traditional and Roth. Consider favoring the Roth IRA over the traditional IRA — especially if you’re far from retiring.

With a traditional IRA, you get an upfront tax break: The amount you contribute for a certain tax year can be deducted from your taxable income for that year. So if you contribute $7,000 this year, your taxable earnings fall by $7,000, reducing your tax bill.

With a Roth IRA, you contribute post-tax dollars, so there’s no upfront tax break. But when it comes time to take money out of the account, if you’ve followed the rules, you can do so tax-free! Having potentially hundreds of thousands of dollars — or a million or more — available to you tax-free in retirement can be a big deal.

4. Contribute generously

Of course, for best results, you’ll want to max out contributions in as many years as possible. When the limit is $7,000, aim to contribute $7,000. As the limit rises over time, aim to contribute the new maximum each year. Once you hit age 50, start contributing those catch-up sums.

Remember, too, that your earliest invested dollars are your most powerful ones — so don’t skimp early on. You can open an IRA account at any of many good brokerages.

5. Consider back-door Roth contributions

You might also want to consider a certain strategy if your earnings are so high that you’re not able to contribute to a Roth IRA: a “backdoor” Roth IRA conversion.

Roth IRAs have income limits, but traditional IRAs don’t. So you can contribute to a traditional IRA and then convert that IRA to a Roth IRA. You’ll be taxed on the amount of the conversion for the year of the conversion, but after that, the money can grow in the Roth with no future taxes due (as long as you follow the rules).

6. Invest effectively

It’s not enough to plow lots of money into one or more IRAs. If you want to achieve millionaire status — or at least get as close as you can — you’ll want to invest that money effectively. Go ahead and buy individual growth or value stocks if you feel savvy enough to pick the best or most promising ones.

But for most people, a simple, low-fee index fund can be all that’s needed to build wealth powerfully over time. Here are a few to consider:

• Vanguard S&P 500 ETF
• Vanguard Total Stock Market ETF
• Vanguard Total World Stock ETF

7. Be really patient

Finally, you’ll have to be patient. Remember Buffett’s lieutenant? Yes, he’s a brilliant stock picker. But he didn’t achieve his phenomenal IRA growth over a few years. Instead, it took several decades.

Refer to the table above showing how money grows. You’ll see that the numbers aren’t eye-popping in the first five, 10, or even 25 years. But they do eventually become quite impressive.

Whether you start today or tomorrow, don’t put off saving and investing for retirement. Formulate a good retirement plan soon — and then stick to it.