Retire A Millionaire, The Easy Way

How to become a Millionaire in 40 easy steps. Invest $5500 a year for 40 years. Get a decent rate of return (7%). Boom. Insta-millionaire. Read below for more information!

I am not a certified financial planner. Any investments are inherently risky (although some less than others). Invest at your own risk. I just like playing with numbers and wanted to share how easy it is below.

I’ve been digging into money, specifically for retirement, for about the last 10 months. Luckily money is easy, it’s just numbers and simple math. People really make it out to be much harder than it needs to be. Let me lay out one very easy way to retire a millionaire.

While companies often have retirement accounts available weather it be a 401K for many private companies, a 403B for government or public jobs or some other type of retirement account, there is also a personal option, a Roth Saving account. This is post-tax money that you can save with the benefit that it grows tax free and you can withdraw it tax free when you retire!

For this experiment we will consider only saving in a Roth IRA as that should be available to the average American.

For 2015 the Roth IRA max contribution is $5,500. Lets assume you start investing in your Roth when you are 25. This should have given you a bit of time to pay off at least some of your college loans, your first car and maybe saved a little up for a house. It will also give you 40 years to retirement, which is a nice number to work with.

If you invest $5500 for 40 years that’s equal to $220,000! Which is a decent amount of money, but perhaps not enough to live off of. Luckily for you with compounding (at 7%/yearly, which I will justify below) with no fees, it will have grown to $1,174,853 over 40 years! You’re a millionaire! Now unfortunately there are going to be some fees. Likely you are not managing your money 100% by yourself, but you can come close using www.Vanguard.com Using this you should be able to easily obtain an expense ratio of .2% or less. An expense ratio is a simple thing that really can end up causing confusion because of how it’s reported. What an expense ratio is is a percent of money invested paid to the company managing your money. A .2% expense ratio means they will take .2% of your money a year. .2% of $100 is only $0.20 that’s why it’s much more useful to convert expense ratios to a dollar value for every $1000 invested. So a .2% expense ratio is $2 per year for each $1000 invested. Once you are a millionaire you are paying $2,000 a year just for someone to hold your money! That is why a low expense ratio is favorable. It is ok to pay this though because many places will charge you much more to manage your money! Up to 1%! That’d be $10 per $1000! So off that side track, if we assume the .2% expense ratio per year this still will leave you with $1,109,739! You’re still a millionaire! That was sure easy wasn’t it?

Now that you’re retired, you’d like to start taking that money out. This calculation is pretty easy also. You simply need to understand what the annual rate of return is, which represents how much your money is growing each year. If you want to make withdrawals to eternity you can withdraw as much as your money makes a year. You should plan to withdraw just a little less than your yearly increase, to take into account down years in the cycle, of which there will be some. Since I assumed a growth of 7% we can calculate 7% of $1,109,739 which gives $77,681. Now this seems like a LOT of money (at least to me!) but remember this is all 40 years from now money.

Of course a million dollars today is not what it was 40 years ago and a million dollars in 40 years certainly won’t be what it is today. For that we will have to do a net present value (NPV) calculation. This is a very simple calculation using the assumed inflation rate and a simple equation.

NPV = R/(1+i)^t

R = future value

i = yearly average interest rate

t = number of years

How you use this equation is simple. For our situation you are trying to find the NPV of R = $1,174,853. We are assuming i = 3.22% (justified below) and a time (t) = 40 years. Inputting these numbers yields $330,696. That’s a pretty good chunk of change in 2015 dollars. If we do the same to our yearly withdrawal we will get $77,681 (40 years from now) equal to $21,865 in 2015 dollars.

Now you might think, man that’s not a lot of money, I can’t live of $21,000 a year. But I’d argue that once you are 65 you will hopefully have paid off your house, cars, etc. Of course you will also have other expenses like medical expenses, travel or perhaps helping out a grandchild or neighbor in need. Luckily you will likely have other forms of income such as Social Security in the USA, some income from a part time job or perhaps a pension from a former job.

This was not meaning to be a comprehensive end all retirement plan! When talking about investments and a 7% return and .2 expense ratio, of course you will need to do a bit of research and work to obtain those. But it’s not hard! A great resource I’ve been utilizing is The Crazy Man In The Pink Wig. His website is a wealth of financial knowledge, given freely!

To make the intro shorter and get you quickly excited about being a millionaire I made a lot of assumptions on returns, interest and the like. I will share the resources below simply so you don’t argue with me too much on these assumptions.

One important note I left out is that the maximum yearly contribution will likely increase as time goes on. This is good for you, the investor, as it means that you will likely be able to retire with even more!

The average annual inflation rate is 3.22% obtained here.

The average S&P 500 return data from 1975 to 2014 was found here and the average was found to be 10.18% average return. I also used the average bond return rate which can be between 4%-6% found here. Using that data I assumed a rate of return of 7%.

How is your retirement looking?Millionaire

7 thoughts on “Retire A Millionaire, The Easy Way

  1. Pingback: Gravity Payments, $70,000 For All Employees | MyWheelLife.com

  2. wow! good work. You’re already in the 1% just by thinking about this and putting in the effort to read and understand enough to compile this post. Yes, it is absolutely possible.
    Some thoughts….consider diversification. Remember, what the government giveth the government can taketh away. Remember earlier this year Obama wanted to alter the College 529 “save for college fund” by ending the ability to remove the money tax-free. The government sees all this money in all these funds and see it as a potential revenue source. Remember, SS money is not there, it’s all been “borrowed” for other “needs” and we know what SS is going to look like when your generation would like to withdraw it if something isn’t changed. What’s the rate of return on the money you’ll be investing in SS?
    Also consider diversifying/investing in things like land, art or whatever tickles your fancy. That way you are not only investing but you are using your money for something you can enjoy for decades as work your nest egg. Just be smart about it. As an example, take land. I’d consider investing in land that offers a premium, like land on a lake or river, or a lot in city/town that is growing. It’ll cost you more up front, but the potential is much better.
    Again, great job. One thing I learned is if one never sets a goal they will never advance towards it. Be willing to adjust, but aiming for the stars and hitting the moon is much better than never even looking up.
    At your age, getting some funds in a 401k will grow a bit unbelievably.

    • I agree diversification is the way to go. I didn’t want to overwhelm people with a full financial strategy right away. If they read something like this it will hopefully get them thinking and they’ll find the next investment opportunity on their own. Hopefully they do enough research before if it’s actually a good idea or not! I find the whole money system fascinating. We give each other worthless pieces of paper assuming we’ll get something useful in return. I have considered this in my investment. I am leaning towards having something tangible like land or real estate like you mentioned because a physical thing has certain value, while a thought (money) might or might get swept up in inflation (however unlikely in our country). I have also been reflecting on the thought from Acts 2:44 “All the believers were together and had everything in common.” I wonder how an attitude like that would affect our world as far as reduction in crime rate? I believe a lot of crime is driven by need, not always want. Of course much is driven by want also. If we can eliminate the need then we can work on eliminating the want. When people reach a level of material goods, some will eventually realize that more does not make them happier. When they realize this, much like the Gravity Payments CEO this week, whey will start to try to help others instead of get more for themselves.

    • This was nothing against 401k’s either. They are also a great way to save money but perhaps they are not open to every person. The more options you have for saving the sooner you can break away from the corporate world and do what you want. Generally this will involve helping the world move in a positive direction if you’ve grown that much.

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