The international retirement savings dilemma: Insights from U.S. IRAs with global relevance

Abstract

This study evaluates the long-term financial outcomes of Roth and traditional IRAs, with their different tax advantages. Global applicability to countries with similar types of retirement plans is emphasized. A full factorial simulation assessed 54 unique combinations of IRA type, investment mix, and tax rates during working and retirement years. Results indicate that investment type plays a more critical role than IRA type in determining outcomes. Portfolios with significant exposure to the S&P 500 consistently achieved higher ending balances and longer-lasting funds compared to portfolios relying on lower-yield investments. Traditional IRAs, leveraging frontend tax advantages, performed best when tax savings were reinvested, though Roth IRAs provided tax-free withdrawals, maximizing backend benefits.
Key findings include the importance of starting early, maintaining significant equity exposure throughout life for higher returns, and understanding that IRA type often has a marginal impact relative to investment strategy. The study highlights that the most effective strategy is situational, influenced by factors such as tax rates and market conditions. These insights, while grounded in U.S. data, offer guidance for retirement planning systems globally. Policymakers and individuals are encouraged to prioritize early, consistent, and aggressive investment strategies to optimize retirement outcomes.