How To Retire a Millionaire In 2021! So Easy, Anybody Can Do It!
Updated: Jan 15, 2021
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So, you want to retire a millionaire but don't know how to? I assume this is why you've landed on this easy to follow "How to" guide to financial freedom; luckily for you I will tell you some of the secrets as to why the rich are rich and why the poor are poor. See, these are the things schools in America don't teach kids, but really should. I would've loved to have had a financial literacy course in high school, it would've saved some of my friends thousands of dollars heading into college, not to mention the millions of dollars heading into retirement. The problem with schools in America is simple: they are made to create employees (that barely make a living).
Think about it, schools in America are basically just little factories that parents send their kids to. They teach you what is right (showing up on time, not being absent, answering only when asked to, listening for bells to tell you when it's lunch time and when you're allowed to go home, doing as you're told, limiting creativity, etc.) and what is wrong (being late, being absent, talking out of term, taking an early lunch, not listening to authority, being creative, etc.). Sound familiar? I am sure you can now look back at your childhood school years and begin to see the similarities of working at a factory and going to school. But fear not, I am here to teach you what they should've taught you in schools. Be sure to keep a close eye out for other subjects I will tackle in the near future, things like Taxes, Starting Your Own Business, Buying Your First House, etc.
To understand how anyone can retire a millionaire, we must look to a simple concept that so many people were never taught about: compound interest. Albert Einstein, one of the smartest men to ever live, once said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.” Compound interest is most easily explained by thinking of a snowball rolling in the snow. Remember what would happen in the cartoons when we were little? As the snowball rolls and rolls through the snow it becomes bigger and bigger, growing exponentially the more it rolls. This is exactly what compound interest is. The snowball is your pot of money and the snow it rolls through could be ETFs, Mutual Funds, Stocks, Bonds, etc. Since many people may not be familiar with all of these types of investments, here is a quick run through:
ETFs or Exchange Traded Funds are assets that track some set of equities; if you're familiar with indexes then think of it like that. ETFs differ from mutual funds because their price adjusts throughout the day (like a stock) rather than at market close. Think of an ETF like a basket that is composed of many different stocks from either one sector or many different sectors. Some very popular ETFs are those that track the S&P 500, in which case the basket is made up of a part of a stock from each of the 500 companies that make up that index. There are many different ETFs for nearly every industry whether it be Real Estate, Earth Materials and Metals, Technology, etc.
Mutual Funds are similar to ETFs but are managed by professional money managers. A group of investors come together and put a bunch of money into a pot that a professional money manager then oversees and creates a "basket" of their own. Usually, if you're a small investor, you won't be involved in mutual funds because they require a large up front cost, and if you ask me, they're not really worth it. ETFs tend to do just as good of a job, in a lot of cases even a better job than Mutual Funds, and have much lower fees and no minimum amount to start off with. Mutual Funds usually require $3000 - $5000 to start with.
Stocks are the asset most people are familiar with. They are shares of a company that people trade over and over in the New York Stock Exchange and other world markets. Stock prices are always going up and down, they adjust basically every second of the trading day. In very basic terms, a stock gives you part ownership of a particular company and as that company becomes more or less valuable, so does your stock.
Bonds are another very basic asset that most people learned about in some sort of economics class. Bonds are debt certificates that either the government or companies put out to fundraise money for themselves. When you purchase a bond, you do not become part owner, instead you simply buy a certificate that says that the company or government will pay you back in x-amount of years with y-amount of interest. As you can imagine, the returns on bonds are much less than any of the other types of assets listed above, but so is the risk.
Now that you know what the different types of assets are, you should be aware of another factor worth considering: Risk. Like everything in life, the riskier it is the greater the reward is as well. If we were to rank each of the above assets in terms of risk from greatest to least the order would be stocks, mutual funds and ETFs (tied for second), and bonds. If we were to rank each of the above assets in terms of reward from greatest to least the order would be the same. In other words, individual stocks are the riskiest but usually offer the most reward as well. For your own knowledge, from 1926 to present day, the S&P 500 (an index of the largest 500 companies listed in the US stock exchange) has had historical returns of about 10% per year. Of course if you look at a smaller time frame, the historical return could be dramatically larger or smaller than 10% because anomalies such as years of huge growth or years of recession are more likely to affect the rate of return in a more significant way. You will soon realize that time is your friend!
Now that you have lots of knowledge in your corner that school probably never taught you, let's put all this information together so I can show you how to retire a millionaire. The first thing you're going to want to do is create a RothIRA with a well known investment firm. "IRA" stands for Individual Retirement Account, "Roth" means it's funded with post-tax money. My personal favorite, and who I have my RothIRA with, is Vanguard, but Fidelity is also great. I would highly recommend you stick with one of these two firms because they offer the lowest fees and the easiest applications to get started. You will need to fill out an application as if you were opening a bank account with Chase or Wells Fargo or any of the big banks. You should get a response pretty quickly, but sometimes additional information is needed to verify your identity, don't ask me why this happens, it just does sometimes and it sucks. I know creating an account is not super fun, but just do it, it'll be worth it.
In case you're not familiar with a RothIRA, it is an investment account that let's you add post-tax money into it and allows you to invest those dollars into ETFs, Mutual Funds, Stocks, and Bonds and everything you make in profits are tax-free when you take it out at the age of retirement or when you're 59.5 years old. With a RothIRA, you can take out any of the contributions you made without penalty at anytime, however if you try to take some of your profits out before you're 59.5 years of age, you would be taxed pretty heavily. I never recommend taking money out of your RothIRA though because you need as much of it in there, for as long as you can keep it in there, so you get the most amount of money.
Those familiar with Traditional IRAs are wondering why I recommend a RothIRA instead of a Traditional IRA which is funded with pre-tax money, but all profits get taxed once you decide to take them out. The reason I recommend a RothIRA is because most people fall into a lower tax bracket when they are younger than when they are older. The theory here is that as you get older, you make more and more money and consequently pay more and more taxes because you'd be at a higher tax bracket; therefore, it makes more financial sense to pay taxes on the money now, when you're at a low tax bracket, rather than later when your money has grown and you're at a higher tax bracket. Trust me, the difference is huge. A RothIRA is a very powerful tool, which is why you can only contribute $6000 per year into it if you're under 50 and $7000 if you're above 50.
Wait a minute, if you can only contribute $6000 a year into the account, wouldn't you need 167 years to become a millionaire? Yes, you would need to save $6000 a year for 167 years to become a millionaire, but we aren't saving money...we're investing money. This is where the fun part begins: compound interest. Remember how I told you that compound interest was like a snowball that keeps growing and growing? That's what it would do with your money. I'm going to go through a couple of scenarios with you, but feel free to play around with compound interest calculators online. Here is the link to my personal favorite and the one I'm using for these examples: http://www.moneychimp.com/calculator/compound_interest_calculator.htm.
A general rule that a lot of Certified Financial Advisors follow is the 60 by 30 rule. This rule states that if you have $60,000 invested by the age of 30, you'll retire a millionaire at age of retirement without ever having to invest another dollar out of your pocket. I know most of you are freaking out right now because you're either approaching 30, are over 30, or don't think you'll have $60k invested by the age of 30; bet you wish you would've learned this back in high school when you were 18 right? Don't worry, this rule can be tweaked a little bit and I'll show you how.
In this first scenario we'll look at Tracy. Tracy is 35 years old, plans to retire at 65, and is feeling sad because she's over 30 and never started her RothIRA. Fear not Tracy, you still have options, but you need to get started ASAP. I really want everyone to realize that the sooner you get this going, the more money you will make! TIME IS ON YOU'RE SIDE IF YOU MAKE IT WORK FOR YOU. TIME IS YOUR ENEMY IF YOU DON'T DO ANYTHING! If Tracy starts her account and contributes $6000 to it every year for the next 16 years and let's compound interest snowball her money without any additional contributions for the next 14 years after that...she'll retire with $1,005,722.09 assuming a 10% interest in accordance with the historical rate of return for the S&P 500.
Here is the breakdown:
The image below shows Tracy contributing $6000 every year from the age of 35 to 51 (16 years) at 10% interest rate / growth rate.
The image below then shows how Tracy stops contributing money to her account and just lets the $264,838.06 compound for 14 years at the same interest rate.
Next we'll look at Joe. Joe is 43 years old, plans to retire at 65, and is feeling really sad because he's well over 30 and never started his RothIRA. Fear not Joe, you still have options, but you need to get started ASAP. AGAIN, TIME IS ON YOU'RE SIDE IF YOU MAKE IT WORK FOR YOU. TIME IS YOUR ENEMY IF YOU DON'T DO ANYTHING! If Joe starts his account and contributes $6000 to it every year for the next 7 years and then $7000 to it every year after that until he turns 65 years old (contribution limits go up to $7000 once you're over 50 years old)...he'll retire with $1,134,244.22 assuming a 15% interest, a little higher than the historical rate of return for the S&P 500. This means Joe will have to be a bit more aggressive with the assets he decides to invest in to get a little bit of a higher rate of return. However, this shouldn't be too hard to do, considering a stock like Target was able to increase 15.7% last month alone during a global pandemic. Joe would just have to have a little more stocks in the mix alongside his ETFs.
Here is the breakdown:
The image below shows Joe contributing $6000 every year from the age of 43 to 50 (7 years) at 15% interest rate / growth rate.
The image below then shows how Joe contributed $7000 to his account for 15 years until he retired at the same interest rate.
Finally we'll look at Marco. Marco is 21 years old, plans to retire at 60, and is feeling really excited because he learned about starting his RothIRA early. Notice how Marco is much younger than everyone, will retire sooner than everyone, and has time on his side. TIME IS ON HIS SIDE! HE'S MAKING TIME WORK FOR HIM! I know a lot of you are thinking that he'll still not qualify for the 60 by 30 rule, which would be true if he was saving money; however, he's investing money, which is different. If he contributes $6000 a year for the next 9 years until the age of 30 at a rate of 10%, he'll actually have $103,772.23. In fact, even if Marco was 24 years old and only had 6 years to contribute $6000 before the age of 30 he would have $61,552.39 at a 10% rate. Still qualifying for the 60 by 30 rule. However, don't forget, the rule can certainly be tweaked as we've seen above; but since Marco qualified for the rule already since he started investing early, he is guaranteed to retire a millionaire. But let's take a look at the actual number he'll have at age 60. Remember this number is tax-free and Marco only contributed $6,000 for 9 years ($54,000 total out of pocket) at a very modest 10% rate and he's retiring earlier than everyone else.
By the time Marco is 60 years old he'll have turned $54,000 out of pocket into... $1,810,763.39
$54,000 into $1.8 million is not too shabby at all.
Here is the breakdown:
The image below shows Marco contributing $6000 every year from the age of 21 to 30 (9 years) at 10% interest rate / growth rate.
The image below then shows how Marco let compound interest work for him at the same interest rate for the next 30 years until he retired.
As you can see, compound interest is amazing. These are the secrets wealthy people that are financially literate know and have done for generations and generations. Unfortunately, it's not a secret that the correlation between those below the poverty level and those that are considered to be financially illiterate is extremely high. I understand that correlation is not causation, but if more people knew about this, if more people were financially literate, there wouldn't be as many people in poverty. Please, please, please start your RothIRA ASAP. If you can't contribute the full $6,000 a year, its okay! Adjust your current principal and annual addition on the compound calculator and make a plan that is tailored for you! You need a plan that works for you!
THANK YOU SO MUCH FOR READING THIS AND COMMITTING TO CHANGING YOUR LIFE AND THE LIVES OF GENERATIONS TO COME! THIS IS PERHAPS THE MOST IMPORTANT PIECE OF WRITING I'VE EVER WRITTEN. A PIECE THAT HAS SO MUCH POTENTIAL TO CHANGE LIVES. PLEASE SHARE IT WITH YOUR FRIENDS AND FAMILY SO THEY TOO CAN BENEFIT FROM IT. 10 MINUTES OF READING IS A SMALL PRICE TO PAY FOR A LIFETIME OF WEALTH AT RETIREMENT!!!
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