how’s it going ladies and gentlemen
welcome back to money and life TV I am Mike the CPA and this is my sidekick
jibber awaiting orders today I’m super excited because we’re gonna be talking
about Roth IRA tax-free income and we’re gonna be looking at on-screen examples
of how much income tax free income you can expect to generate from your auth
IRA later on in life if you’re new to our channel I just want to take a moment
to say welcome if you’re interested in learning more about personal finances
investing taxes and things like that I would go ahead and hit that subscribe
button right now you can find that subscribe button down below
because we make new videos every single week around these subjects and we also
produce videos on this channel to help you with your career and your life
alright guys if you find this information helpful don’t forget to hit
that like button and let’s get started this video is kicking off a series of
videos I’ll be making around Roth IRAs and you’re gonna be seeing the power of
compounding interest and also in this video you’re going to be able to see the
power of investing in a Roth IRA and the power of the tax-free income you can get
from it later on in life if you do it right so let’s look at some on screaming
examples right now and you’re gonna see me go to a spreadsheet and the
spreadsheet is going to be available or download for free in the description
section below this video so make sure to check it out and I’m gonna leave a
dropbox link to that spreadsheet and I may also put it on my website money in
life TV comm so that you can use it and refer to it anytime you want all right
without further ado let’s look at this spreadsheet we have created and you’re
gonna see that it’s gonna break down not only different rates of return so you’re
gonna able you’re gonna be able to see at what rate your money would grow but
also you’re going to be able to see how that would impact your income from your
Roth IRA later on in life now I’m making this video obviously because
of this audience and because of this channel and you guys have requested that
you want to learn more about tax more about investing and Roth IRA is an area
that covers kind of both it’s a it’s a tax and investing topic and I I really
encourage you I mean this is one of the best investment vehicles you can use if
you qualify for it in order to save and build up an income for your retirement
there’s hardly anything out there that beats this today in terms of stock
market investing and things like that the money you can invest in here will
greatly impact in age you in retirement since I’m talking about the future I
just need to take a moment guys just excuse me just for a second because I
need to talk just for a moment directly to my brother-in-law you see I have a
brother-in-law and he’s a great guy but he’s only 22 years old and he’s in a
situation right now where he has earned income which means he would be able to
put money into a Roth IRA and he could set one up and he’s in a good living
situation right now he’s living at home so this is the perfect time for him to
start one right that he’s has very few expenses and if he uses money wisely
he’s going to be I doing a huge favor to his future self right so excuse me for a
moment hey brother-in-law I hope you’re
watching this video and I hope this video finds you well I was thinking
about you and as I put together this spreadsheet
and I was like man you know this is a great opportunity for you and just I’m
just thinking about what this could do for you later on in life because we care
about you so I just wanted to take a moment and say and tell you that if you
don’t take advantage of this great opportunity you have in front of you
right now and do something such as the Roth IRA I’m going to rock your world
oh and it doesn’t stop there if you still decide that this is not a good
idea chipper has some words for you and you
don’t want to tick off the bird!!!! all right thanks guys I just had to have
that one-on-one conversation with my brother-in-law real quick
right there because we really care about him we love him and we want him to do
well in life as I’m sure you would want your family to do well and as well as
your friends so let’s get started so like I said this spreadsheet is going to
be available for download and I’ll link it up in the description section below
this video now I’m not gonna cover all the rules of a Roth IRA because I’m
gonna do another video directly after this are coming up soon that’s gonna
cover all the rules you need to know to establish and open a Roth IRA but
currently just you know fYI each person can contribute up to fifty five hundred
dollars a year into a Roth IRA if you’re over the age of 50 you can do sixty-five
hundred dollars a year so what that breaks down to fifty five hundred
dollars a year is roughly meaning you can invest four hundred and fifty eight
dollars and 33 cents a month and that is after-tax so the way that works is you
get paid they take taxes off your check right well the net amount of your check
is the amount of money then you would have leftover to potentially invest in a
Roth IRA so it’s after-tax money it’s not pre-tax money like your 401k it’s
completely separate and different from that and now your 401k at your company
might have a Roth option and it might make a lot of sense to do that option
but the Roth IRA in general is just a separate account from that that you can
single person can contribute fifty five hundred hundred dollars a year in two
and so this spreadsheet just so you know we’re assuming let me get to that box
iPhone in the examples you’re gonna see below
but we’re gonna assume that every year a person’s going to max out the Roth IRA
in each year worth $5,500 right and also assume that person is going to
contribute money to this Roth IRA and tell their the age of 65 and then they
stop tactically you can contribute to it until you’re about age 70 and then you
have a stop but just for this example we’re gonna assume $5,500 a year until
age 55 and so we’re gonna analyze that based on various rates of return and
based on various ages so starting right here I want to look let’s look at
example 1 because example one could assumes a very conservative 4% return
right that’s very conservative and I think most people with their eyes closed
because invest and get a return like that so as you can see the way this
works is this column over here shows the age you begin investing in a rough so we
I’ve given a few examples so from age 20 to age 50 and so every 5 years I’ve
shown another example and what this would mean is that there this is the
second column here is the number of compounding periods until age 65 so if
you have if you started at age 20 and you contribute to age 65 that’s 45 years
right well if we pull up our little calculator and we do 45 times 12
there’s 450 compounding periods so that’s where that’s coming from just so
you guys know how that math works okay and then this third column right here is
going to show you how much money that would grow into had that person done it
and got an average return the whole time of 4% on average so as you can see here
I’m not gonna read over all the numbers but if you started at age 20 and for
vested fifty five hundred dollars a year for 45 years that money would grow into
roughly seven hundred thousand dollars okay now you’re gonna notice and I’m not
like I said I’m not gonna read every one of these because you can take a look and
download the spreadsheet for yourself all you need to have is Microsoft Excel
2007 for 20 so if you start at age 25 that’s 40 years of compounding
which is 480 so 12/12/12 times 40 is 480 compounding periods the money would grow
to five hundred and forty three thousand instead had you started at twenty five
instead of age twenty so you can see that’s a pretty big difference and just
that difference alone that’s five years you wouldn’t think five years would
matter that much but it does because if we look at five
you know the 606 194,000 and within we subtract out the nicks one below at the
five hundred and forty three thousand five thirty-four that’s a hundred and
fifty thousand dollar difference just by waiting five years so the differences can be astronomical
and very if they can be magnified based upon how long you wait to do this in a
type of return you’re getting so that’s what I really wanted to point out to you
guys and so if you’ve been on the fence of starting a Roth IRA today is the day
now it’s the time if you have a spouse you’re saying oh please honey we got
we’ve got to start one of these things today is the day now’s the time you can
show them this spreadsheet and you can show them mathematically how much it’s
costing you just by waiting now me personally do I have a Roth IRA
absolutely do does my wife have a Roth IRA as well absolutely and every year
we’ve started maxing those out and I believe we opened them when we were 28 I
wish I could have done it sooner but 28 so when we started but now every year
every year and this year I’ve got the Musto before we look at income amounts
let’s go down the line and show you what some different returns would be like had
you got even a better return so in example two we’re looking at a 6% annual
average rate of return so the whole time the person’s investing the person is
getting a 6% return and the numbers really are substantial so look at if you
started at age 20 and you’re able to get a 6% rate of return the whole time
you’re gonna have about 1.2 million dollars by the time you’re age 65 now if you start at 25 you’re gonna have
900 17,000 but if you wait to start until you’re 50 which is only you know
about 15 years of compounding periods it’s only a hundred and thirty three
thousand dollars so it’s very insignificant it’s still better than
nothing don’t get me wrong but time will cost you a lot of compounding interest
that you could have potentially earned so that’s what if you get if you have a
6% now let’s look at example 3 which is around the stock market historically
over the past hundred years ranges on average of yields of 6 to 8% a rate of
return you know if you if start at age 20 this is pretty amazing but if you
were able to start at age 20 and got an 8% average annual rate of return for 45
years you would have 2.4 million dollars by the time you’re 65
you would pretty much be set because the money you’re good from that is
completely tax-free so you could live on very little if you started at age 25 now
this I want to point out to you watch as the you’ll notice as the annual
percentage average rate of return increases and so does the magnification
of the difference in time so let me let me show you what I mean cuz that what I
just said probably didn’t make sense but if you start at age 20 right so you
would have two hundred and forty three thousand are two million four hundred
thirty three thousand dollars in 96 cents – if you had just waited five more
years to start doing this one point six million or 1 million six hundred ten
thousand seven hundred five your difference you wouldn’t think that I
didn’t think this until you’re in the method blew me away but if you were able
to get an eight percent rate of return and did invest the rest of your life
into this thing as a single person the difference and we’re just waiting five
years is eight hundred thousand dollars that’s really impressive whoa whoa just
Bravo Wow which is enough to buy two homes in most places it’s amazing it’s
just crazy so that’s why I want to encourage you to start today start now
whatever you need to do to align your finances in order to do this start start
today so now let’s look at so we’ve seen what the money can compound to because
this is a lot of compounding interest examples right
and I’m using a calculator to do this I’m using a compounding interest
calculator on my phone it’s the TVM calculator I believe what it’s called
I’ll link up what it’s called and just so you guys know what app I use and I
would like to do a review on it at one of these on that app because it’s such a
cool app and it’s free and there’s so many different calculators in there and
so that’s what I’ve used to generate a lot of these calculations okay so we’ve
looked at what the money would grow to now let’s look at how the income plays
out and kind of how I think about that or at least how I personally analyze
that you can obviously draw down the principal of the amounts you’ve put in
but if you if you’re thinking like me so my goal personally I’m just gonna tell
you this is just what I want to do you don’t have to do this obviously but I
would like to let this money grow to a substantial amount and so that I can
just live off the income and not touch the principal and hopefully someday that
extra principal I can then pass it on to my family or my heirs or whoever – to
benefit from so they can build more wealth even quicker so our org donated
huge chunk of it the charity that’s my future plans but anyways if you come
over here and I just scroll to the right so it’s lined up so you just go from
left to right so let’s look at the four percent rate of return example and what
I’ve done is I say estimated annual tax-free income based on the following
looks like I got an error there based on the following annual dividend yields
solve I’ll fix this for you guys so when it’s ready for download but what this
does it says okay if you didn’t touch this money if you
didn’t draw down the principal but just lived off the dividend yield what kind
of income would that generate for you on an annual basis so as you can see here
if you look at just a two percent right here so this column matches up with this
one I’m looking at this 13,000 as an example so you would have just by giving
a two percent dividend yield and there’s tons of stocks out there that could do
this there’s Microsoft McDonald’s you know coca-cola Pepsi things like that
could easily give you a two percent dividend yield or more and what it does
is it it looks at two percent and multiplied two percent yield multiplied
by what the total amount is because that’s roughly about the yield you’ll
get on this money so that yield will give you
$13,000 almost the $14,000 a year income which breaks down if you want to do the
math 13,000 882 I only got to do to figure out what that is monthly is this
divided by 12 right so just divided by 12 and so that’s about 1150 six dollars
a month in tax-free income and it also looks at you know now what if you get a
4% rate or each I mean dividend yield on on that amount of money well check it
out you take 27 so 4% yield and looking at
this first row is 27,000 765 divided by 12 that’s about it a little bit over
$2,000 a year income and the beauty of this income is it’s completely tax-free
there’s there’s really no better income than tax-free income because it’s not
gonna affect your taxes which is amazing so this is just tax free money so that
would mean you would have to pull out as much from your 401k or other sources
because you would have this much up front completely tax-free and you would
get to keep all of it which is so wonderful now obviously as it goes down
the line here if you wanted to look at what it would be for a 50 year old you
would just look at this row right here and come across like this and you can do
the math the same now let me just first take a time let me skip down to the 8%
one because that’s where it gets really fun now assume that you were a 20 year
old 20-something year old and somebody told you about this to start doing it
and you did it and the money grew and this is the kind of income you would
have how do you have an 8% return the whole time so then your money grows into
2.4 million right into this example well come over here I think we could
reasonably get a 3% dividend yield easily I think we could so let’s let’s
do the math on that 3 percent so 3 percent is this number right here right
73,000 and that’s this 3 percent multiplied by this total amount of the
value of that person’s account so seventy three thousand dollars per year
is the annual income so seventy three thousand dollars divided by 12 is a
tax-free income of six thousand dollars a month
now who can’t live off that a tax-free income of $6,000 a month that’s amazing
so that’s the power of this thing guys that’s the power of starting early as
possible and building up a Roth IRA now you might say Mike what if I married
does you know how would that work out well if you’re married for
simplification purposes if you both started maxing out this Roth IRA at the
same time which is rare that would happen but if you did and you wanted to
know how much more it would be if you had two people doing this I’ve ran the
math I don’t have it here but all you would have to do is if this person if
your looks like your spouse started at the same time as you and you guys both
follow the same track so let’s say let’s take a 25 year old right let’s say you
both got married around 25 years old and you both started putting money in so
what you would do is you take this projected amount of five hundred forty
three thousand and multiply that by two and you would have one point eight seven
million that’s that’s basically how the math works out if you were had two
people doing this and because if you’re married each person like I said can
contribute fifty five hundred dollars a year into the Roth IRA so that’s if two
people are doing it so I wanted us to take a moment guys and just share with
you the power of compounding interest and the beautiful power of the Roth IRA
because it’s one of the only ways to get tax-free income and hopefully they don’t
change the laws about the around this but if you can qualify for this vehicle
this account do it you know I have mine through Scottrade which is gonna soon be
Ameritrade because they’re merging our Ameritrade bot Scottrade
but the point is is that there’s many ways to start an open a Roth IRA to
check with your financial advisor and like I said I’m gonna be making a whole
series of videos around this topic because it’s such an important topic in
my opinion and it’s because they’re I don’t expect there to be social security
any more in the future and I don’t expect there to be pensions any more in
the future unless you’re very lucky that this is why it’s more important than
ever to figure out right now today regardless of how old you are how much
retirement income you’re gonna need because the likelihood of you having
Social Security and pensions is gone I just you have either so basically you
have to self fund your retirement and it’s a very
a lot of money to do it trust me it does but but the sooner you start the better
and having that income working for you getting your money to work for you so
you don’t have to work the rest of your life is what you’re going for at least
that’s what I’m going for I think that’s the kind of life you want
that’s a little kind of life I want so if you guys enjoyed this video if you
found it helpful let me know by hitting that like button down below be sure to
subscribe if you have not already because every single week we make new
videos like this that are basically help you improve your financial position your
career and your life and be sure to share this with a friend especially a
friend who’s very young like my brother-in-law how’re you still watching
this I hope I hope you’re still watching this brother-in-law because I would
really encourage you I’m like begging you to do this because you’re gonna
thank your future self so much if you do now if you don’t do this until later on
life it’s still gonna be helpful but yes you can see mathematically time cost you
a lot of extra money that you could have had have you started earlier and so
that’s what I wanted to make this video so you could know how much income you
can expect in the future from your Roth IRA just from dividend yields alone when
it’s pretty powerful and I hope you guys enjoyed this alright guys well thanks
for taking the time out of your day to watch this video thanks for sticking
with me you can make sure to download the list in the description section down
below and I will see you guys next week and I will see you guys in the next
video live life on caged bye guys