11 years ago my former band performed at the Portland Saturday Market (see image above). At that point in my life I knew nothing about personal finance, though like a lottery ticket holder, I retained lofty dreams of making it big through my passion of writing and performing songs.
If I knew then that ANYONE can earn a million dollars by performing music – with a few simple investing techniques and a long-term vision – I might have gotten an earlier start and shaved a few years from my retirement timeline.
During the past week we learned that the IRS has increased 401K and IRA contribution limits beginning in 2023. In other words, the IRS has now made reaching your retirement goal even easier, and this blog shows how adding just $500 per year to your retirement savings can lead to a loftier balance for your golden years.
For the purpose of this project, I’m most interested in the $500 expansion of the limit for ROTH IRA’s, but it’s worth noting they tacked on a $2,000 increase for 401k’s too. I’ll share how that changes the folkefire mission of acquiring a million dollars by maxing out ROTH IRA contributions through musical performance during the next 29 years.
My previous calculation assumed that beginning at age 40, and adding to my existing retirement balance, I could max out my ROTH IRA for the next 30 years using the yearly allotted amount, invest it in a low-cost index fund (VTI), assume 8% growth per year, and earn $1 million by age 70 – eventually transitioning to max out my ROTH IRA contribution entirely through earnings from musical performance. I use the simple MoneyChimp compound interest calculator to make my calculations.
Previous calculation:
Age: 40
Starting balance: $50,000 (includes 401k)
Yearly ROTH contribution: $6,000
Time: 30 years
Balance after 30 years with 8% annual rate of return (VTI): $1,182,832
But check out how the new rate increase affects the balance!
New calculation:
Age: 41
Balance: $60,000 (includes 401k)
Yearly ROTH contribution: $6,500
Time: 29 years
Balance after 29 years with 8% annual rate of return (VTI): $1,234,818
Difference: +51,986
Adding $500 per year increases my balance by $50K+ after 29 years. Incredible!
My calculation is very conservative. For one, it doesn’t calculate future ROTH IRA contribution increases, nor the catch up contributions that will kick in as I age. Also, my calculation is purposefully excluding my 401k contributions or traditional IRA contributions because I just can’t ever envision earning enough from music to max out more than one retirement account. Where did I get this idea for VTI? It’s found in the book The Simple Path to Wealth by JL Collins, I just replace VTSAX (Mutual Fund) with VTI (ETF).
The reason I exclude those additional accounts lies at the heart of the FolkeFIRE project. In addition to saving money, an equally important goal is to turn my hobby of musical performance into a sustainable side project, avoiding the burnout that plagued all of my creative projects in my 20’s and 30’s – and continuing to enjoy live performance – eventually earning enough to max out my ROTH IRA.
If I can be glib for a moment, the expanding contribution limit is making my goal harder, but it’s a challenge I think I can live with!