Maximizing your Roth for 10 Years… Then Set It & Forget It!

Posted on June 15, 2014 by DividendDiplomats

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Now I know I am one to fully dive into research, use calculators and figure out the, hopefully, most efficient and effective way to get to a goal. Today I want to show you that if you maximize your Roth IRA contributions, currently at $5,500 per year, you can do so for 10 years and then all of a sudden you can STOP contributing… Yes – STOP placing more funds into your personal Roth IRA. This is the “set it and forget it” model and I will show that through dividend reinvestment and a conservative market return allows you to no longer need to really contribute after 10 years, as you’ll have quite a “hefty” nest egg and will be able to use the $5,500+ on other investments – like your individual-taxed stock portfolio. Read more to discover the benefit of maximizing your Roth IRA.

Age 24.5 Years Old – January 1, 2014

Let’s say you are 24.5 years old (coincidence, right?) on the 1st of January and you have exactly 35 years until you can receive the benefit of your Roth IRA. I like the Roth IRA option, as you pay with after tax dollars now and receive distributions/withdrawals tax-free in retirement – “paying it forward” as one could say. You decide to contribute the $5,500 (current IRS maximum for those under 50, $6,500 for those 50+) on the 1st of every year into the S&P 500 index, which yields 1.87%. You think – ‘wow, here comes my investment! I will do this every year until I am 59.5!’. You begin accumulating your shares. You do this every month for every year until you are 34.5 years old…

Age 34.5 Years Old – January 1, 2024

Okay, phew – it’s been 10 long years. You are making more money than ever before and, for the sake of not predicting the future, you have contributed the maximum $5,500 every year at the beginning for the last 10 years into the S&P 500 index fund, that has always yielded 1.87%. You have received a conservative 8% return and have reinvested every dividend you received. After 10 years, your account will look like this:

You are at $87,111.29 and just received $1,389 in dividends for the year. From here, you think, gosh I need the $5,500 to fund another project and could use that instead of placing it into my Roth IRA. What happens if I let this sit by itself for the next 25 years with no more contributions, but still maintaining the DRIP and the long-run appreciation of 8% per year. Let’s fast forward to 59.5 years…

Age 59.5 Years Old – January 1, 2049

You just woke up after going to bed at 10:30PM and think – oh shoot, I better catch the highlights of the ball dropping at ~~TimeSquare in New York~~ Playhouse Square in Cleveland, Ohio! You decide, however, to check your account where your Roth IRA is to see where it stands, as you realize you can begin taking dividends & distributions tax-free. You remembered you went on never-to-forget vacations using the $5,500 you have had every year, as well as invested in other areas – stock market, rental properties, start-ups and even help fund your children’s 529 plans and grandchildren’s plans. You are so happy and are retired. Let’s see what the account shows now on what happened over those last 25 years:

Wow! Your account is at $916K and is yielding approximately $16,000 in dividend income for you on an annual basis! All you did here was invested $5,500 for 10 years of your life and that effort produced an account worth over $916K. You only had to invest $55,000 of your working dollars to produce that, and now you have a nice supplement to your retirement income to the tune of $1,333 per month or $16K per year. What’s funny – is this keeps the 1.87% constant and historically a no-tax effect 8% return is quite conservative.

Using my ROTH IRA 2.95% yield

For a quick change of value and income – my Roth IRA (not including my 401k at work) yields 2.95%. Using that, the value reaches $91,750 after 10 years of contributing and after I stop – $1,232,505.13 in value and produces $32,770 in dividend income! It’s phenomenal.

To conclude – if you push yourself to invest into your Roth IRA option for 10 straight years – you can essentially “set it and forget ” your way to a $1M portfolio that yields you over $2.7K per month in dividend income. Dividend reinvestment, appreciation and discipline will pave a path for you to a sure way of financial freedom. I plan on stopping after my calculations show that, as I want to place that $5,500 into other cash flowing assets – like the individual/taxed stock portfolio, rental properties, etc.. Also – would like to use some of those funds to have experiences – explore the world. Thanks for stopping by! Have ya’ll thought about this? What are your current plans for the contributions to the Roth? Invest early and Invest often everyone.