Curious about how much money you’ll accumulate in your Roth retirement account?
If you’ve got Microsoft Excel (or just about any other popular spreadsheet program) running on your computer, you can use its FV function to forecast the future value of your Roth IRA or Roth 401(k).
The FV function calculates the future value of an investment given its interest rate, the number of payments, the payment, the present value of the investment, and, optionally, the type-of-annuity switch. (More about the type-of-annuity switch a little later.)
The function uses the following syntax:
=FV(rate,nper,pmt,pv,type)
This little pretty complicated, I grant you. But suppose you want to calculate the future value of an individual retirement account that’s already got ,000 in it and to which you are contributing 0-a-month. Further suppose that you want to know the account balance, its future value in 25 years and that you expect to earn 10% annual interest.
To calculate the future value of the individual retirement account in this case using the FV function, you enter the following into a worksheet cell:
=FV(10%/12,25*12,-400,-20000,0)
The function returns the value 771872.26 – roughly 2,000 dollars.
A handful of things to note: To convert the 10% annual interest to a monthly interest rate, the formula divides the annual interest rate by 12. Similarly, to convert the 25-year term to a term in months, the formula multiplies 25 by 12.
Also, notice that the monthly payment and initial present values show as negative amounts because they represent cash outflows. And the function returns the future value amount as a positive value because it reflects a cash inflow you ultimately receive.
That 0 at the end of the function is the type-of-annuity switch. If you set the type-of-annuity switch to 1, Excel assumes payments occur at the beginning of the period (month in this case), following the annuity due convention. If you set the annuity switch to 0 or you omit the argument, Excel assumes payments occur at the end of the period following the ordinary annuity convention.
So there we have it: real-world ways and means to effectively calculate and predict the oh so important future value of your Roth IRA and Roth 401k. It’s important to note that the term “Roth” does not denote the name Rothschild, but rather, the Roth IRA is named for its chief legislative sponsor, the late Senator William Roth of Delaware.
Established by the Taxpayer Relief Act of 1997 (Public Law 105-34), a Roth IRA (Individual Retirement Account) can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible).
As with all IRAs, there are specific eligibility and filing status requirements mandated by the Internal Revenue Service. A Roth IRA’s main advantage is its tax structure. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (self-directed IRA).