Trying to understand Roth IRA's a bit more:
Let's say I retire at 65 and have $1,000,000 in my IRA at this point, with 7% average interest.
Does this mean that now I'm 65, I can take out my 7% of interest every year and use it as my income? i.e, I'd be making $70k a year doing nothing
Or is there some limit on how much I can take out and shit, or do I misunderstand completely?
From what I understand, with a Roth ira, the money has already been taxed so you are free to withdraw any amount of it you want after you turn 60 as long as it has been open for more than 5 years. So basically, after 60 it turns into a million dollar checking account.
>Let's say I retire at 65 and have $1,000,000 in my IRA at this point, with 7% average interest
First, at age 65 you aren't going to be earning 7% unless you're incredibly reckless. At that age with that amount of savings, you can't afford a 30-40% year-over-year decline, which is possible with stocks. So you're going to be primarily in bonds and treasuries and earning closer to 5%.
Second, at age 65 you potentially have a lot of years to cover, and you obviously don't want to run out of money if you live a long life. Nothing's more said that a broke old person. While the average life expectancy is lower, most prudent people plan to make their money last until 88, 92 or even longer to be on the safe side. That's a lot of years to cover, especially as your medical costs rise.
Third, during that time, you need your account to last even if you hit a string of bad investment years. While most bear markets are short, any extended downturn can really strain your ability to keep drawing funds. So you'll never be able to draw even your average earning rate because the timing could screw you royally.
All of this factors into what we call the "safe withdrawal rate" which is the amount that you can take out and still be strongly confident (99% certain) that your money will last through your entire retirement.
The most current research puts the safe withdrawal rate at about 3%. While some older, popular studies suggested 4%, the markets have gotten a little more volatile and 3% is the safer estimate today.
So if you save $1MM by retirement, you can safely, confidently expect to draw $30,000/year in retirement, increasing the amount each year by the inflation rate. Add to that any social security benefits you might have earned, and that's a good estimate of what your life will look like in retirement.