What is an appropriate Roth IRA interest rate for someone who is prepared to save over a lifetime?
I was wondering what a good Roth IRA interest rate would be for someone who starts saving a retirement fund at 18 years old and retires at 65. I'd put in $200 in a month, but only have it compounded annually.
There is no such things as a fixed interest rate for 47-plus years. It is a certainty that rates will vary from year to year, and vary widely through the economic cycles that will inevitably occur. In the past 47 years, short term rates have ranged from zero to over 20%; long term rates have had just as much variability. I have to mention that you probably should not be investing at age 18 in interest-bearing instruments. The return is too low and since you have the benefit of a long time, you can take more risk. Invest in equities instead. If you own a single bond or bond fund, you are doing yourself a disservice. Good luck.
I am assuming that what you mean is rate of return rather than interest rate since prevailing interest rates are extremely low and probably not the best place to hold funds for retirement. With that said, however, when looking at a 47-year period for investment, you would be well advised to consider a combination of international and U.S. equity investments. Why? Because over periods of 20 years and longer, equities have always been the asset class with the highest returns. So at least for the first 30 years, you will probably be best positioned to hold 100% equities. Thereafter, you should begin to shift a percentage of your holdings into fixed-income investments.
Over extended periods, the average annual rate of return from equities has been about 10%. For fixed-income investments, the average annual return has been about 5%. A good rate of return over the time span you've mentioned would be 6% to 7% and perhaps better. If indeed you are focused only on fixed-income investments, the return would be about half that, which may or may not exceed the concurrent rate of inflation.
That is an interesting question. Especially in today’s low interest rate environment. But to get at an answer that is appropriate for you, I think we need to ask another question. That question is how much volatility are you willing to accept.
There is a relationship between volatility -- or fluctuation in your principal -- and the rate of return you can expect to receive. The lower the chance of fluctuation, the lower your rate. The higher the chance of fluctuation, the higher your opportunity for growth.
To give you some idea of how your money could grow at various rates, I did several calculations based on the information you provided above.
· 1% would put you over $140,000
· 3% could grow to $250,000.
· 5% would get you over $450,000.
· 7% would be over $875,000.
· 9% would put you in the area of 1.7 million dollars.
As you can see, the difference in return is considerable depending on how much fluctuation you can accept.
If you follow this link, it will provide more information on various investment allocations that might help you figure out what is right for you.
** Values are not representative of an actual investment and should not be considered a projection of future performance and are provided for illustrative purposes only. Illustrations do not include fee assumptions and charges inherent in investing. Investments with higher rates of return are associated with higher volatility and a greater risk of loss. **
I think you are trying to ask what a good annual return rate would be for an IRA account. Generally speaking, try to be conservative. Over the long term the stock market generally has a return of approximately 9% a year. But as you know, there are bad periods where returns don't get that high, and other years that are much higher. I always tell clients we aim for 7% a year so that we are conservative, and if we outperform great. Using a good combination of the right types of fixed income structures and stocks with dividends, a 7% a year rate of return should generally be feasible. And don't forget to reinvest those dividends! Often over the long term 50% of your return in a stock comes from reinvesting dividends! So that really helps grow your wealth too!