For the younger viewers out there: how would you like to passively earn over 4 million
dollars by retirement? Without doing anything risky like gambling on a stock that you hope
is the next Amazon or running to Las Vegas and betting everything you have? Well today,
I’m gonna share 2 simple and easy things you can do that can allow you to earn, not
save, but earn over 4 million dollars and, in doing that, I’ll show you what steps
to follow, the exact numbers I used and how the math works out.
But first, I want to welcome you to Healthy, Wealthy, and Wise, the channel that focuses
on different ways to improve our financial wellness. I’m Kevin and I wanted to make
this video, for my younger viewers, particularly the millennials and Gen Z, so
that you can set yourselves up for a nice retirement without needing to get lucky to
do it. Now these 2 things I’m gonna talk about today are also ones my older viewers
can use as well, you just won’t have the benefit of having as long of a time-line to
get the bigger returns that our younger viewers can have. And it still might really benefit
you a lot…IF you share the information with your kids, who will then hopefully follow
it, so that you won’t have them knocking on your door asking for money after they’ve
long moved out…or hopefully moved out! Now to set the stage, what I’m going to
share with you is hardly revolutionary, but I also know that depending on your background,
you might not have had a lot of exposure to investing while you were growing up. I look
back at my younger self and I didn’t have that either. Now this isn’t a sob story,
because I came from a good, hard-working family that were really good savers, but they just
didn’t invest, so I didn’t have anyone to really show me how it was done. One of
the many ways that my parents really helped me was that they allowed me to move back home
with them after college for a couple of years, where I was able to pay off my school loans
to the point where I then started to have some extra money. Now coming from a family
with a background of saving, I didn’t go crazy buying a lot of things I didn’t need,
but I also knew saving money in the bank wasn’t a great way to grow wealth. At that time,
the internet was still in its infancy so there wasn’t a lot of great information out there
that you could find. So what I did, knowing nothing about investing, I bought a book that
really opened my eyes and really helped me get to where I am today. And that book was
Investing for Dummies. Yep, a for Dummies book…I love those books because
they are so easy to follow. And that book has paid for itself thousands of times over.
So if buying that book and learning from it makes me a dummy, I’m more than fine with
that. Now today, compared to that time, there’s
a lot of information out there available to you, and of course, YouTube is one of the
main places people go to learn all kinds of things. But much of that information isn’t
great, whether it’s because someone’s trying to sell you on something, pitching
you on a get rich quick scheme, or because they don’t know what they are talking about,
or don’t have the experience. So as I celebrate the 20th anniversary of my 29th birthday (wink),
I want to share some of the things I’ve learned over the years that can help you earn
over 4 million dollars for retirement without taking any extraordinary risks to do it.
So let’s get to the first of the 2 things you can do to become a millionaire multiple
times, and then we’ll follow this up with a look of how the numbers add up.
Number one: opening and investing in an IRA. IRA stands for individual retirement account.
The big benefit of an IRA is that it allows you to invest your money in a tax advantaged
way. How that works will depend on which of the two types of IRAs you decide to invest
in. The first type is a traditional IRA where you invest your money tax-deferred, which
basically means you invest the money before it’s taxed. With this type of account, the
money you invest grows tax-free over the years and you only pay taxes on it once you start
taking money out. So with this type of IRA, as you put money in now, not only does that
money not get taxed so you have more left to invest with, but if you leave it in the
account for say, 40 years, it grows during that time without you having to pay any taxes
on it until you start taking it out. The second type of IRA is called a Roth IRA.
It’s almost a mirror image of a traditional IRA in that, for a Roth IRA, you use money
that has been taxed already, so that’s the money that’s left in your paycheck after
taxes are taken out. But the difference here is that, as your money is invested in the
Roth IRA, it grows and grows and when you take it out, again maybe 40 years later, you
won’t have to pay any taxes on it. So while a traditional IRA has the tax benefits on
the front end, a Roth IRA has the benefits on the back end.
Now this video isn’t meant to go over all of the nuances or the pros and cons of a traditional
IRA vs a Roth IRA or even which is better, it’s basically me saying that investing
in either type can help you meet your retirement goals or in the case of this video, show you
how, over time, it could help you earn over 4 million dollars. However, if you would like
me to make a more detailed video on the differences between a Roth and a traditional IRA, let me
know in the comments. So part of the assumption for maximizing your
investment returns is that you’re contributing up to the annual limits. Currently the annual
limit for IRAs is $6,000. And then once you turn 50, you can contribute up to another
$1,000. When I get to showing you the numbers, I will only be using $6,000 per year for my
IRA entry. Obviously over time, that limit could get increased making your returns even
higher. Or once you’re over 50 years old, putting in that extra $1,000 will increase
your returns as well. But the key here is that you want to start your IRA early on so
you can benefit from more years of compounding growth.
Another really important part of having an IRA is how you’re investing within it. For
those of you with many years away from retirement, you’ll want to make sure you invest primarily
in stocks as their returns historically are significantly much higher than in other asset
classes such as bonds. The safest, most cost-effective, and easiest way to do this is to invest in no-load, low-fee
index mutual funds or exchange traded funds called ETF’s that track the overall market.
This type of investing allows you to reduce the risk of investing in individual stocks
which also requires a lot of time and effort in attempting to pick the right ones. Because
you don’t have to pick the stocks, it’s a big time saver and a good way to invest
as it has a proven history of having solid returns. If you just invested your money in
an index fund that tracks the overall US market since 1926, where you don’t have to do anything
else other than put your money into the fund, you would have average annual returns of over
10%. Now remember, history can’t predict the future so you’re not guaranteed anything,
but history does have a way in showing you how past strategies have worked vs ones that
didn’t. An alternative to an IRA is participating
in an employer sponsored plan like a 401k if you have access to one. With a 401k, your
contribution limits can be higher which would allow you to earn even more investment income,
but for the purpose of this video and showing you how to reach the 4-million-dollar mark
in earnings, we’ll stick with you investing $6,000 to either an IRA or a 401k.
Now depending on your situation, $6,000 could be a lot of money that you might not feel
you have. But I would challenge you to look at it in a couple of different ways to see
if investing that much is doable. If you break it down to a monthly amount, it would be $500
per month. Or it could be $115 per week. And remember, if you are using a traditional IRA,
you will have saved paying taxes on that amount, which can help you have a little extra money
to work with. Before we really dig into the numbers on how
your IRA can grow over time, let’s talk about the 2nd thing you can do to passively
earn over 4 million dollars by retirement and that is investing in a health savings
account or an HSA. An HSA is something that was not around when I first started investing;
they weren’t established until 2003. And even once they were available for me, I didn’t
really understand how they worked until a few years ago when I started to see the opportunity
that they presented in growing wealth. In fact, I was so enamored with how they worked,
that my second video ever on the channel was about HSAs. I’m not going to go over all
of the details about HSAs for the sake of time on this video, but if you want to learn more about
them, I’ll link my updated video which has all of the current information for 2022.
For a quick overview though, an HSA is an account where you can contribute pre-tax dollars that
you can then use to pay for healthcare expenses tax free. And within your HSA, and a lot of
people don’t know this…is that you can invest the money within your account, just like
you can do within your IRA. In fact, over 90% of people don’t invest within HSAs which
really limits its ability to help grow wealth. Now the big thing with health savings accounts
is that they have triple tax savings, better than either type of IRA or 401k. So let’s
talk about the three ways you save on taxes. One, the contributions you make to the account
are tax-free. Two, the withdrawals you make for qualified health expenses are not taxed.
And number three, any money invested in the account grows tax free. Let that settle in.
You could contribute tax free, allow the money to sit in the account and grow tax free, and
then pull out the money tax-free, as long as it is for reimbursement of healthcare expenses.
So you could potentially let your money grow in an investment account and never pay any
taxes. And by the time you’re 65, and let’s say you have no healthcare expenses, which
would probably be unlikely, but let’s say you don’t, then the HSA would act like a
traditional IRA, where any distribution you take would be taxed at your current tax rate.
Now the one thing you have to be aware of is that to contribute to an HSA, you do have
to pair it with a qualified high deductible health plan. That part scares a lot of people
off, but typically when you’re young, you tend to have lower healthcare needs, so this
is a great time to invest in an HSA and have a high deductible plan. And because high deductible
plans tend to have lower or cheaper premiums, you could potentially save more money there.
The video I referenced earlier talks about this so definitely check it out for more details.
Now getting back to the purpose of building wealth, again, we’re gonna use the assumption
that you’re contributing to the maximal annual limits. These get updated more frequently
than IRAs, so you’ll want to keep up on that. Because I do talk a lot about health
savings accounts on the channel, if you subscribe, you’ll see the updates as soon as I have
them to share with you. The newest numbers I have at the time of this video are for 2022,
where you can now contribute up to $3,650 for individual healthcare coverage and $7,300
for a family health plan. Alright so let’s get to the numbers so you
can see where investing into these two accounts can earn you over 4 million dollars if you
don’t plan to retire for 40 years. So we’ll start with a few assumptions to make our calculations
easy to understand and also to err on the low side. The first assumption is that the
contribution limits will stay the same every year. Obviously that won’t happen, but it
keeps the math easy, and besides, we can’t predict what they will be every year into
the future. But since we know that contribution levels, if anything, will go up, contributing
more in the future would even lead to higher potential returns, which obviously is a good
thing, right? The second assumption is that we’re investing
the maximal contribution limit for both an IRA and an HSA for self only coverage. That
number comes in at $9,650….6,000 for the IRA and 3650 for the HSA. And, keep this mind,
if you’re contributing to a traditional IRA, that’s $9,650 that you won’t have
to pay taxes on for the current tax year. So if your effective tax rate was at 15%,
you would save almost $1500 in money that would just otherwise go to taxes. That’s
not bad, and I’m not even including those savings in the 4-million-dollar number! Now
for calculation purposes, we’ll look at contributing monthly where we take our 9650
number and divide it by 12. So our monthly contribution will be $804 dollars; 500 for
the IRA and 304 for the HSA. And remember for this to work, you have to be consistent
and contribute every month. The last assumption is the average annual
rate of returns for the stock market. For this, we’ll look at using the S&P 500, where
since 1926, it’s average annual return has been just over 10%. To make things easy, we’ll
use 10% as our expected returns. Again, just remember, past returns don’t predict future
returns. And in the short term, risks are higher for investing in stocks; but over long
periods of time, returns have shown to be in excess of 10%. The 40 year timeline we’re
using would be considered to be a long period of time for an investing horizon.
So let’s see what we get when we calculate the numbers.
And there you go, based on the numbers we inputted, you would have a portfolio of over
5.1 million dollars. Just from investing in an IRA and an HSA. To break it down, you’ll
see that you contributed $386,724 throughout the 40 years. And those contributions, through
the power of compounding every month, year over year, earns over 4.7 million dollars
leaving you with a retirement nest egg of over 5.1 million dollars. And you can get
this with doing just 2 things, investing in an HSA and an IRA. And this doesn’t include
other things you can do to further grow your wealth, such as investing in taxable accounts
and real estate. Now what’s important here is that you start
early and you’re consistent with this…like the tortoise and the hare, slow and steady
wins the race. The compounding effect of investing is where the magic happens, where you can
sit back and watch it passively grow. Of course, you have to actively make the decision to
put the plan in motion and then follow through with it, and that’s where many people fail.
If you start just 10 years later, say you start investing in these accounts at 35 years
old vs 25, you would end up with a portfolio of 1.8 million, that’s substantially less,
right? Now you did end up putting in less money, only 290,000 dollars instead of 386
thousand dollars, but losing those 10 years of being in the market is what really cost
you 3.3 million dollars. I’ll link the calculator I used for this video in the description so
you can work out some different scenarios for yourself. Now this video isn’t to tell you that you
should invest this way or that you can’t tweak it to fit your needs or risk levels.
For instance, as you get closer to retirement, you may want to start allocating your portfolio
to have less stocks and more bonds to decrease your short term risks. But it should give you an idea of how an IRA and
an HSA can be two critical components that you can lean on when investing for your retirement.
You might think it’s a long way off, but trust me, the older you get, the faster time
goes by. So what do you think? Were you surprised that
investing in just an IRA and an HSA could potentially leave you with 5 million dollars
for retirement? Are you interested in more videos on retirement accounts? Let me know
in the comments. And if you’re new to health savings accounts and want to learn more about
them, remember to check out my updated video on how best to use them.
I hope you found this information helpful, and if you did, please push the like button
and share it with anyone that you think could benefit from the video. And please let me
know any thoughts or questions you have in the comments, that way we can all learn from
each other on how to improve our financial wellness. And if you’re interested in seeing
some of my non-financial-type videos, I hope you check out my new, second channel, How
to with Kevin where I share my experiences of other things I’ve learned to tackle…or
things that come up that I have to figure out, and I bring you along with me. And you
can also follow me on Instagram…all of that information is in the description. Thanks
so much for watching…and until next time, have a great day!