digest
Short Summary
Main recommendation: Open a Roth IRA (individual retirement account) as early as possible, ideally in your teens or early twenties, and contribute whatever you can, up to $5,500 per year of earned income, with the money left invested until age 59½. Graham Stephan says, based on his own projections, that early tax-free compound growth could help you retire a millionaire, and that he believes the account suits people earning little now who expect higher income later.
Key Points
- A Roth IRA is funded with post-tax money: contributions are not tax-deductible now, but earnings grow and can be withdrawn tax-free at 59½.
- Starting early matters because of compound growth: $1,000 invested at 18 is worth about $17,100 at 60 (inflation-adjusted), versus about $16,000 if invested at 19.
- Contributions can be withdrawn at any time without penalty, but earnings must stay in the account to remain tax-free.
- Stephan says the account is best suited to people in low tax brackets, roughly ages 18 to 30, who expect to earn much more later.
- Stephan says contributing the maximum $5,500 per year from age 18 could reach over $1.2 million tax-free by 60, assuming roughly a 9% annual return minus about 2% inflation, a non-guaranteed average.
- Stephan says the Roth IRA should sit alongside other investments, not serve as a person's entire retirement plan.
Details Worth Noting
- Concrete instructions:
- Open a Roth IRA as soon as you are eligible; if you are under 18 with income, a parent must co-sign or consent to open the account.
- Contribute only up to what you earned that year (for example, if you earned $3,000, contribute no more than $3,000), with a maximum of $5,500 per year.
- Choose a brokerage with low fees. Stephan uses Vanguard and also names Charles Schwab and Fidelity as options.
- Invest the contributions; Stephan says he holds an S&P 500 index fund inside his Roth IRA, and a target date retirement fund is an easier option that picks the allocation for you based on your retirement year (for example, 2060).
- Leave earnings in the account until 59½ to keep withdrawals tax-free; contributions can be withdrawn earlier if needed, but you usually cannot re-contribute the withdrawn amount.
- Stephan's example figures: investing $1,000 per year from 18 averages about $264,000 at 60 (about $43,000 contributed); $2,000 per year yields about $444,000 (about $86,000 contributed); $5,500 per year yields over $1.2 million (about $231,000 contributed). He assumes roughly a 9% annual return minus about 2% inflation.
- He stresses these projections depend on average returns, which are not guaranteed.
- Stephan notes he has no financial interest in any provider and is not paid for these recommendations.
Bottom Line
Starting a Roth IRA early and funding it consistently is, by Stephan's account, one of the most valuable financial steps a young earner can take, but it should complement rather than replace other retirement investing.
