There are a number of popular finance YouTube personalities like Graham Stephan talking about how you can be a millionaire by simply contributing $18 a day into a Roth IRA, but that doesn’t tell the whole story.
Not only is that advice too simple, it doesn’t take into account the value of a million dollars thirty years in the future.
Inflation will approximately reduce the spending power of that million into $250,000.
The 4% Rule says that if you constrain yourself to only taking 4% of your day one retirement balance, adjusted for inflation as income, you have an 86% chance of your money lasting through your life expectancy.
When you crunch the numbers, this would mean surviving on $10,000 a year in today’s dollars in retirement.
You have to be much more aggressive with your investing and saving as a 30 year old person.
Instead of just fully funding your Roth IRA as a 30 year old, you could also befully funding your Roth 401(k). By investing $82 a day, your final balance after thirty years would be over $4 million, or roughly $1 million after you factor in inflation.
According to a recent Ernst & Young study, if you were to earmark 30% of your retirement savings to cash-value life insurance you could as much as double your sustainable withdrawal rate in retirement.
It gives your stock market balance a chance to recover from any down years during the crucial first decade of retirement.
Even when you factor in that your Roth IRA and 401(k) will have lower balances, your ability to pay your lifestyle expenses allows you to take 8% distributions from your portfolio in retirement.
Because your cash value life insurance is growing safely and productively, it effectively replaces the bond portion of your portfolio. This gives you a permission slip to take more risk in your stock market portfolio and yield a higher overall return on investments.
When you factor all that in, with the 8% distribution rate, even with inflation, your distributions in retirement would be closer to the equivalent of $80,000 a year in today’s cash value.
If you heed these YouTuber’s advice, it’s a good start but you will end up with very little spendable cash flow in retirement. If you instead up your savings rate and fully fund your Roth IRA and 401(k), while allocating 30% to your cash value life insurance, you can supercharge to your tax-free retirement plan.
Mentioned in this episode:
David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
Come Back America by David Walker
PowerOfZero.com (free 3-part video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com