Introduction: Roth IRA Contributions versus Traditional IRA Contributions for Renters
In a series of articles, The Skilled Investor compares different lifetime financial planning projections for Fran and Fred Frugal to illustrate the relative value of adopting different financial planning strategies. Fran and Fred, both ages 30, are a married working couple with $100,000 in combined annual earned income. (See the “Fran and Fred’s Baseline Lifetime Planning Assumptions” section at the bottom of this article for more information about Fran and Fred’s current personal finances and their other lifetime financial planning assumptions.)
Fran and Fred’s baseline lifetime financial plan is described in an article entitled: “Retirement Savings Needs of Renters — prior to any financial planning improvements.” Obviously, in this baseline scenario Fran and Fran have NOT adopted many of the lifetime financial planning practices that would make it easier to achieve financial success in life.
Fran and Fred’s lifetime financial plan, when they use traditional IRA contributions
In their non-optimized baseline lifetime projection scenario, Fran and Fred did not utilize any tax-advantaged retirement investment accounts, such as IRA or 401k accounts. The following graphic shows Fran and Fred’s lifetime baseline projection, when they DO NOT MAKE any contributions into IRA accounts or into any other tax-advantaged retirement plan. Their financial assets are projected to be exhausted when they are age 95.
In another scenario, Fran and Fred tested whether making traditional IRA contributions over their working years would have a substantial effect on their baseline projection. The results of Fran and Fred’s “traditional IRA contributions only” scenario can be found in the graph below. This graphic projects what would happen, if Fran and Fred were to utilize 100% of their maximum traditional IRA contributions, during their working years. The solid blue wedge represents the build-up and draw-down of their traditional tax-advantaged IRA assets. The green wedge projects their taxable assets.
Instead of their assets running out at age 95 in their baseline “no IRA” scenario, their assets are projected to last until they are both at least age 100. Furthermore, at age 100 they are projected still to have about $98,000 in remaining assets — mostly in tax-advantaged accounts, which would cover their living expenses for almost another two years, until age 102 for both.
See this article for a discussion of Fran and Fred’s “traditional IRA contributions only” scenario: “Benefits of Traditional IRA Contributions for Renters.”
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