If Sam contributes $5,000 a year to his IRA, how can he expect the IRA to provide him with a $30,000 annual income after retirement?
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a.The tax advantages of IRAs increase the value of contributions.
b.He will be contributing five times as long as he will be retired.
c.Exponential returns should increase his contributions.
d.The government guarantees a retirement income for IRAs.
'the government' only has taxpayer's money and cannot afford to pay this level of pension
most people work around 40 years and nowadays live for maybe 20 - 30 years after retirement
it will take 6 years work to pay (net) for 1 year retirement
exponential returns would have to be MASSIVE to pay for 20 years retirement from approx. 5 years worth of contribution
Lesson: we are sitting on a pensions timebomb and will not be able to afford this lifestyle in the future.....
Suppose he contributes for 40 years (age 20 - 60)
Suppose he lives for 25 years after retirement (age 60 - 85)
He needs a fund of 750,000 to fund this (a simplification I know )
He needs an interest rate of 6% compound exponential growth to achive this AVERAGE over 40 years.
In the last 100 years the average value has been less than 4%
If there is 3% inflation over 40 years then his 30,000 will only be worth approx. 10,000 when he retires anyhow