This article delves into the potential financial outcomes of consistent Individual Retirement Account (IRA) contributions, highlighting how different investment strategies can significantly impact retirement nest eggs. By examining scenarios with an S&P 500 index fund and a more diversified 60/40 stock-bond portfolio, it illustrates the power of compounding and long-term saving. The discussion further extends to evaluating whether these accumulated sums are sufficient for retirement, introducing the well-known 4% withdrawal rule as a guideline for sustainable income.
The Internal Revenue Service (IRS) sets the annual IRA contribution limit, which for 2026 is $7,500. This figure is slightly higher for individuals aged 50 or older, who can make an additional catch-up contribution. For our analysis, we consider a consistent annual contribution of $7,500, starting at age 27 and continuing until retirement at 67. This 40-year saving period forms the basis for projecting future wealth under different investment approaches.
We examine two primary investment avenues. The first involves placing all contributions into an S&P 500 index fund. This fund tracks the performance of the 500 largest U.S. companies by market capitalization. Historically, from 1957 to 2025, the S&P 500 has yielded an inflation-adjusted annual return of 6.69%. Assuming this historical performance continues, an individual consistently contributing $7,500 annually could accumulate approximately $1.38 million by age 67. This strategy offers the potential for substantial growth but also carries higher volatility.
The second scenario explores a more conservative approach: a 60/40 portfolio, consisting of 60% U.S. stocks and 40% bonds. Data from the CFA Institute indicates that this portfolio has historically generated an average inflation-adjusted annual return of 4.89% from 1901 to 2022. Under this investment model, the same annual contributions over 40 years would result in a retirement fund of just over $882,000. This portfolio offers less volatility but also lower potential returns compared to an S&P 500-only strategy.
The question of whether these sums, $882,000 or $1.38 million, are adequate for retirement is multifaceted. It depends heavily on an individual's desired lifestyle, other potential income streams like Social Security or pensions, and personal spending habits. Financial experts often reference the 4% rule, developed by planner Bill Bengen in the 1990s, as a guideline for sustainable withdrawals. This rule suggests that a retiree can withdraw 4% of their portfolio in the first year of retirement, adjusting for inflation thereafter, to ensure the funds last for approximately 30 years, assuming a balanced stock and bond portfolio.
Applying the 4% rule, a retirement fund of $882,000 would allow for an initial annual withdrawal of $35,280. When combined with an average Social Security benefit of roughly $2,000 per month (totaling $24,000 annually), the total annual retirement income would exceed $59,000 before taxes. This amount approaches the average annual spending of individuals aged 65 or older. For the more aggressive portfolio totaling $1.38 million, the initial annual withdrawal could be $55,200, bringing the total annual income with Social Security to over $79,000. However, it's crucial to acknowledge that the 4% rule assumes a diversified portfolio and a purely equity-based portfolio carries increased risk, particularly if significant market downturns occur early in retirement.