You've got an IRA, right? This site has been preaching the tax benefits of both traditional and Roth IRAs since the beginning... and we aren't going to stop now. So hopefully you've been diligently saving in your IRA, with the hope that some day you'll have a couple million dollars in there (or at least a good amount of funds you can tap in retirement). But we're not going to talk about your IRA today - we're going to discuss Mitt Romney's IRA.
Mitt Romney, it was revealed in financial disclosure documents, has an Individual Retirement Account worth somewhere between $20.7 and $101.6 million dollars. Note that IRAs have a small limit when compared to 401(k)s and other employer retirement accounts, so this came as somewhat of a shock to people with IRAs. How did Mr. Romney achieve such an impressive sum in his retirement account?
(Editor: This article strictly calculated the amount he could have contributed with defined contribution plans. Romney almost certainly had access to a defined benefit plan as well at Bain, allowing additional contributions. This could have increased his cost basis by 2-4x from the number we derive below. Here's the current Bain profit sharing plan details, but it was started in 2008. Alternatively, our numbers are close, but exotic investments explain the out-performance. See our calculations about how you would have performed had you invested the same amount in the S&P 500 as Romney likely did with his defined contribution plans.)
Making Wild Assumptions About Mitt Romney's IRA
Well, unless Mr. Romney releases all of his tax returns back to 1975 (when the IRA was first created), we'll never know for certain. However, here at DQYDJ we're not opposed to wildly speculating on the causes of his IRA balance.
Mr. Romney was in the workforce for the entire duration of the IRA's existence, up until 1999 when he left to be President & CEO of the 2002 Olympic Games in Salt Lake City. From 1981 onward, the IRA limit was $2,000 (previously, it was $1,500). His wife, Ann, is a stay at home mother. Non-working spouses were unable to contribute until 1982 when the limit was $250. From 1997 - 1999 the Romneys would have been able to take advantage of a change in the law allowing Ann a full $2,000 in contributions. We are going to assume that the Romneys maxed out their IRA contributions, putting a total of $57,000 into the accounts.
Even with huge growth in some of the years, $57,000 seems small, doesn't it? Well, consider that much of the contributions likely came from rolling over 401(k)s. We will assume that the Romneys used the strategy of maxing out their 401(k)s. Mr. Romney worked at Boston Consulting Group from 1975 until 1977, then either Bain & Company or Bain Capital (which he founded) until 1999. Here's where things get weird - 401(k)s have a contribution, match, and a separate company contribution limit. We're not going to count the 401(k) until 1982, since most companies didn't have one yet (no word on BCG or Bain & Company). That year, it was possible to get up to $45,475 in the plan. The next year, that limit was cut to $30,000, until 1986. In 1986? The limit was frozen at $30,000, but employees could only contribute $7,000 (we'll be generous and assume Bain made up the difference). The next major changes in Deferred Compensation plans didn't come until 2001, so we'll assume that the Romneys hit the $30,000 mark in the years between.
All in? The Romneys may have contributed $57,000 to IRAs and $555,475 to 401(k)s. Once rolled over, the cost basis would be $612,475 - a very good number, undoubtedly helped in our example by company contributions. After 1999, Mr. Romney entered public service - first, the Olympics, and second, in 2002, as Governor of Massachusetts. Since we're assuming (so we have free reign to do whatever we want), let's assume that no additional money was added to the IRA in the years from 1999-2011 (the year of disclosure). Let's figure out what the average rate of return would have to be, factoring in compound interest, to get $20.7 or $101.6 million dollars.
Crunching Fake Numbers
By running our garbage assumptions through actual formulas, we found that to get a value of $20.7 million in 2011, the Romneys would have to average about 16.44% annual returns. To make their upper hand number fit, returns would have averaged 23.81% annually. It would be tough to achieve similar gains today without inflation to distort the numbers... to wit, something costing $1 in 1975 would cost roughly $4.23 in 2011 by this measure (Roughly 4.09% annualized from 1975-2011). the numbers look huge - but remember that an IRA can be self directed, so it is likely that Mr. Romney had access to some very interesting investment opportunities through Bain.
(Editor: see note in introduction)
Lessons Learned from Mitt Romney's IRA
The most important thing to recognize is that the growth rates achieved means that the appreciation of the assets held by the funds well outpaced the cost basis of the fund. $612,475 is a huge amount of contributions even without appreciation. But, as you can see from the graph above, most of the appreciation in the assets may have come when the Romneys were no longer contributing to the IRA. It is very important to contribute early and often. Contributions near the end don't make as big a difference to the terminal balance.
What lesson can you take home from this discussion? Does Mitt Romney's IRA balance make more sense with these numbers? Isn't compound interest huge, especially when applied to the fake numbers above?