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
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