MarketInsight | Who wants to be a millionaire?
How would you like to get paid thirty thousand tax-free dollars a year? What if I told you that you could earn that every year for the rest of your life? And your children’s life? And their children as well? Most of the time when someone makes a claim like that, I would advise you to run; run far and fast. Get rich quick schemes rarely work. Most of the time they are just a con to separate you from your hard-earned money. This is different, I promise. What makes it different? It is not quick. It is slow. In fact, the whole plan takes 30 – 35 years to implement. My plan relies on two well-known investment concepts called compounding and dollar cost averaging.
So, here is how it works. First you need 35 years. Second, you will need to make an investment of $450 a month. Now if this was an infomercial, I would describe that as “less than $15 per day.” But, this is not an infomercial. This is math. What I want you to do is to take that $15 a day and invest it into a Roth IRA. Inside the Roth IRA, I want you to invest into something that resembles a Standard & Poor’s Index 500 Fund. Index 500 funds seek to replicate the return on the stock market as a whole. This article presumes you will make a return of 8 percent on your Index fund. (Frankly, you will probably make more, but 8 percent is a good number and one that gets used most often in examples of this nature.)
So, at the end of 35 years, your $15-a-day will have increased in value to slightly more than one million dollars. Congratulations! You are a millionaire. The even better news is that because you put the money into a Roth IRA, you are a tax-free millionaire, which is pretty much the best kind of millionaire to be. You can take out as much or as little as you like every year and never pay tax on the income. My suggestion is that you take out thirty thousand dollars a year, but if you wanted, you could take it all out and buy a house or a small yacht or blow it all at the craps table in Vegas. Beware though — if you take your Roth to Vegas and you win, you will have to pay tax on your winnings.
The thirty-thousand dollar a year income is based on you earning a 3 percent dividend. Lots of stocks pay 3 percent, including Coca-Cola and Intel. As long as you receive the dividend inside your Roth and then take it out, it is tax-free to you … forever. And like all stories with a happy ending, you and your family will live happily ever after.
Scott A. Grant is President of Standfast Asset Management in Ponte Vedra Beach. He welcomes your comments or questions at firstname.lastname@example.org.