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Dispatches

It’s Not Easy to Accumulate $1 Million in an IRA

An investor would have to follow both a disciplined savings strategy and an aggressive portfolio strategy to accumulate $1 million in his or her individual retirement account (IRA).

An investor would have to follow both a disciplined savings strategy and an aggressive portfolio strategy to accumulate $1 million in his or her individual retirement account (IRA). This strategy would have involved both maximizing IRA contributions and staying fully invested in the S&P 500 index over a 36-year period. In order accumulate $5 million, the same investor would have had to maximize his or her savings in an employer-sponsored plan (including the maximum legal amount of employer contributions) and stay fully invested in the S&P 500. Conversely, if the individual only contributed to an IRA and followed a conservative allocation strategy of achieving rates of return equal to those reported by the Social Security trustees for special issue government bonds, he or she would accumulate a balance of just $303,420. These are the findings of a Government Accountability Office (GAO) study for the period of 1975 through 2011.

Two scenarios were run as part of an analysis of IRA balances. The GAO sought to gather information on whether the tax benefits of IRAs accrue primarily for higher-income individuals. The agency estimates that fewer than 50,000 taxpayers had IRA balances of $3 million or more and fewer than 10,000 had IRA balances of $5 million or more. “It would take an aggressive stock market investment strategy or investments in assets unavailable to most investors to accumulate an IRA balance over $5 million,” wrote directors James McTigue and Charles Jeszeck in the report.

Most taxpayers (98.5%) had IRA balances of $1 million or less in 2011, with the majority having far less. The GAO calculated the median accumulated IRA balance as being about $34,000.

The information on the 2011 balances was gathered from the Internal Revenue Service’s (IRS) Statistics of Income database. IRA custodians report the fair market value of accounts to the IRS. The GAO analyzed the data by taxpaying units, which included married couples filing joint returns. The data included inherited IRAs, but excluded savings held in defined-contribution plans (e.g. 401(k) plans). Defined-contribution plans were factored into the scenarios for accumulating $1 million and $5 million.

“Individual Retirement Accounts: Preliminary Information on IRA Balances Accumulated as of 2011,” James R. McTigue and Charles A. Jeszeck, GAO, September 16, 2014

Discussion

Ed G. from NC posted over 11 years ago:

I would think that the easiest way to attain a balance of > $1M in a 401(k) plan would be to roll it over from an employer plan. The report doesn't seem to take that into consideration.


Robert Dreisin from OR posted over 11 years ago:

Precisely. Do we have those rollover data?


Erik Wiener from PA posted over 11 years ago:

The analysis just shows how important it is to start young. Thirty six years implies they started at 29. The ease increases substantially if you compound for 41 years, if you compound maximum contributions starting at 21, ie 44 years, it is easy to accumulate 1,000,000. That still let's a new worker retire early. Unfortunately, 1,000,000 is not that much.


Lee Cordon from ID posted over 9 years ago:

30 years ago the contributions amount was only $1,500 per year. At $5,000 each year, it would go much faster.


Tony Niilus from CA posted over 9 years ago:

I established a Roth IRA in 1998 with a $60,000 IRA conversion. I was not able to add any money after the initial amount due to income limit restrictions. Now, 18-years later, the Roth account is worth $732,000. I think that is an annualized return of about 14.9%.


Gregory Carr from NC posted over 9 years ago:

That's very impressive, Tony. Do you mind telling us what specific investments enabled you to go from 60k to 732k in 18 years?


John Prugh from AZ posted over 9 years ago:

Wow! Amassing a million dollars in your IRA is much harder than you think. I don't think that the preceding analysis took inflation into account. If that is the case, then that $1,000,000 you have in your IRA (or actually "your kids" managed to amass in theirs, since it is too late for you) is really only worth about $300,000 - $500,000. In other words, (encourage your children to) "start (very) early and try and save (an awful) lot.


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