How to turn your $10,000 Roth IRA into $1,184,186 tax free

The Roth IRA can give you tax-free growth for your retirement savings plan.  But what does that look like?  How much do you need to contribute to become a millionaire in retirement?  We all want to be rich or have the financial independence necessary to do what we want when we want, right?

You could save and invest, but the Roth IRA grows tax-free, so all those would be taxable dollars, continue to stay invested, and work for you.  This is the power of compounding and tax-free growth.

Here is an example of how investing $10,000 in the Roth IRA can grow to over $1,184,186.

Table of Contents

    Roth IRA Investing Assumptions

    Anytime we run projections, illustrations, or try and figure out how much we need to save to reach a financial goal, we have to use assumptions.  These are nothing more than educated guesses, guesstimates for short.

    Investing in the Roth IRA versus a non-qualified account comes down to taxes on the gains.  The Investments may be the exact same, but getting those extra dollars to avoid being taxed can boost both your Roth IRA and your overall financial life.

    In no particular order, the first guesstimate is the rate of return. In this case, how much your Roth IRA will grow is usually expressed as an annualized number.  We will assume an 8% rate of return.  The reason we use 8% is that the S&P500 has achieved a 10% plus rate of return over long periods, and it's the closest thing to real-world expectations.  We could use 10%, but shorter periods don't consistently produce 10% in the S&P500, so we use 8%.

    S&P500 Rates of Return

    Here is a page of historical returns of the S&P500 from 1926-2020.  These are annual compound rates of return from point to point.  It may seem overwhelming at first, especially if you're not used to rates of return, but it's easy once you understand how it works.

    Take any two dates, and you will find the annualized compound rate of return.  The return you would have achieved investing in the S&P500 each year between the two dates.  You can quickly figure out the rate of return over similar time frames but using different years.  As you will see in the video, the point to the bottom left is 10.3%.  The time frame is 1926-2020, which shows a 10.3% annualized rate of return.

    However, if you look from 2000-2020, 20 years, you would have only achieved a 6.1% rate of return.  Imagine you are ten years from retirement, and your Roth IRA invested in the S&P500 has only produced a 6.1% rate of return.  You might feel disappointed, like you're doing something wrong or need to make a change.  This is precisely why you need to understand how assumptions work versus real-world results.

    You also have choices to make.  Assuming an 8% or 10% rate of return does not mean you will achieve that result; it's only an assumption.  The investments you choose will impact the results, not the assumed rate.

    Roth IRA investing for the long haul

    Investing for retirement is a marathon, not a sprint.  Staying invested can help you avoid costly mistakes.  The following evidence is simple yet powerful.  Here is a chart of investing if you missed the best days in the market.  While almost everyone that sees this chart immediately agrees they should stay invested, it's much easier said than done.

    Go back to. the above example compares the S&P500 from 1926-2020 versus 2000-2020.  There is a massive difference in returns from these two periods, 10.3% versus 6.1%.  Both periods are invested the entire time but would you freak out and make a change if, after 20 years, your return was 6.1% versus the assumed 10.3%?

    You can see that staying invested in this chart; would be optimal not to miss the best days.  Again, easier said than done, but is it hard to stay invested?  It's more psychological than most realize.

    Compound Interest vs. Simple Interest

    The magic of compounding can not be understated either. Comparing compounding to simple interest can help you understand compounding's full potential.  A simple interest example is an income stream such as rental income.  You own a property, rent it, and collect the same amount each month.  Compounding, on the other hand, grows the earnings too.  It's a snowball.

    It is possible to reinvest and compound rental income, but first, you need to accrue enough money to buy another property, so it's not as magical as other investments.  I'm not trying to steer you one way or the other when choosing investments.  It's an example to understand the concept of simple vs. compound interest.

    In the above example of not missing the best days in the market, you can see the full effect of compound interest,  $10,000 grows to $1,184,186.  Simple, yet magical.

    Roth IRA vs. Investing

    You can invest inside a Roth IRA, but the Roth IRA is not an investment.  The Roth IRA is an investment vehicle in the same way that a basketball court doesn't make a great basketball player.  And just like great basketball players, not all investments perform as expected all the time.

    Reaching your retirement planning goal using the Roth IRA can give you a lot of tax-free money in retirement.  However, it would help if you chose the correct investments as well.  The success of your retirement plan goes beyond historical stock market starting and endpoints or choosing a Roth IRA as your investment vehicle.


    Complete Transcription

    I will talk about a strategy that you can use to turn $10,000 into $1,184,186. Now, there's not just one strategy for investing. Some work better than others, but there's not just one. But most importantly, please take away from this video what you're probably doing wrong. What's causing you not to get a better rate of return?

    Now, this is your first time on our channel. Welcome to the channel. And if you're returning to our channel. Welcome back. My name is Travis Sickle. I want to get right into this. So I'm going to go ahead and pull up these charts. I want to walk through them. But let's start at the beginning with the S&P. 500.

    The S&P. 500. This is a pretty neat chart. Here is the S&P 500 index. And you're probably like, what on earth is this page? Let's go ahead and zoom in on the rates of return over the last from 1926 to 2020. So this is what we call a matrix chart or a matrix chart for the rates of return of the S&P 500 over time.

    This is annualized compounded, so from 1926 to 2020, the S&P 500 did 10.3% on an annualized basis. That's pretty cool to see quickly between two dates on this chart. But I wanted to point out over the long haul, at 10.3%. So that is what you could have earned over that time frame, 10.3%. We can do the math really quickly.

    That's 94 years, by the way, if my math serves me right. If you invested for 94 years, like who's going to invest for 94 years? At a 10.03% rate of return, and you started with, let's say, $10,000, you know what? Let's say we put in $6,000. That's what you can put into a Roth IRA. Right. And we never did anything again.

    That would be $71,737,983. That's crazy math. When you're thinking about it, you're just going to invest one time $6,000. But that's over 94 years. Now, let's pull up this chart from First Trust. So this is put together by First Trust. And these dates are going from not the same dates we just saw, but this is going from 1979 to 6/30/2021.

    So fairly recently And it's showing you the growth of $10,000 invested in the S&P. 500. So let's start right there. You can see it is missing the best fifty days at $84,580. So that $10,000 is how much money you would have, but you missed the 50 best days. Now let's not miss that many days but let's bring it down to the next one.

    We're missing the best 30 days so we eliminated the best 30 days. And look at that. If we did that then we would have had 10,000 would have grown into 191,006 86. If we missed the best ten days. We're at 528,829 so you see where this is going towards that we're taking out the absolute best days. Now think about that over time.

    We're talking about from 1979 to remember those 365 days in the year 1979. Am I doing the math. 1979 to all the way to 20, 21. And we're only missing the best ten days and we got 528,000 but if we took only missing five of those days. So now this is going to go up to 734,212. So where's the trend going all the days.

    If we never missed a day that means we invested in the S&P. 500, we set it and we forget it. That means it would grow to 1 million, $184,186. Now you might be thinking what really is the negative or what's the cause of losing money in the stock market? One of the biggest culprits of losing money in the stock market is not.

    You can't see it from this chart. Yeah, you're missing some of the best days in the stock market and you're probably thinking, well, just don't miss the best days. You know, you can try and miss those mediocre days or the worst days in the market. Obviously, you want to miss all the negative days in the market, but this is what the reality looks like.

    If we flip over to this other chart here and this is what reality looks like but it's not what we feel. We feel that all we're looking at and what you're looking at right here is a bull and bear market. Look at that. The gold, the yellow are the bear markets. But look how much more bull markets there are than bear markets.

    But we spend a lot of time feeling worrying about down markets. But look how infrequently and short-lived they really are. But the other thing that's really interesting to me is the average bull market period lasted 4.4 years with an average cumulative total return of 154.2%. And that's great. But what we focus in on is the bull market that's lasted 4.4 years, and then we immediately try to apply it.

    So we say, well, if the last bear market was 4.3 years ago, then we should get out of the market, right? No, because that's just an average because look at these. If you had done that, I mean, how you would have missed all this upside. Look at 12, 12.3 years was this bull market right here. And look at that.

    You would have missed all of this upside over here if you got out at 4.4 years because you're looking at those averages. So it's difficult to kind of figure that out. But in timing the market, that's what you miss. And then you flip back to that other chart that I just showed you. And it's significant. And that's really the important part that I'm trying to point out is that trying to time the market when you're invested in this strategy and that's diversification.

    That's investing in the S&P 500. Don't confuse this with other strategies. So and I think that's where a lot of people kind of tend to lean towards is they try to use multiple strategies at the same time. And that causes a lot of problems. Like you're trying to go into individual stocks. I wouldn't I wouldn't look at investing like this if I was invested in individual stocks, look at it a little bit differently.

    But if you're diversifying your portfolio, this is really relevant and really important to try to time the market usually ends in disaster, maybe just not a disaster. But look at that. You have to work how many more years just to get to the same point That's something that you probably don't want to do. You want to be as efficient as possible.

    It's thinking that you can get out just to get back in at a better price. But you're looking at it, you use it, you're applying the wrong strategy. It's diversification, diversify and dollar cost average. Keep saving, keep saving, keep building that wealth, keep building that retirement. Plan. So 10,000 to 1.1 million and you really just had to start saving those dollars into the S&P 500. That isn't bad at all. If you enjoy this video, like subscribe and leave a comment down at the bottom.