How to Make $6,000,000 by the Time You’re Born
Jan 2022
One of the most important games you will ever play has thousands of pages of rules. Tens of millions of dollars ride on your strategy. The game is personal finance, the rules are the tax code, and there is a way to win across generations.
How well can you do in a lifetime? Success is exponential. Historically, index funds in the stock market grow 7% per year adjusted for inflation. After 50 years of growth, a $100K investment becomes $3M. Not bad, but another 50 years would yield $90M. The difference is staggering! And the secret is there is a way for you to take advantage of the extra time.
The key player in this story is the Roth IRA. You can put up to $6,000 every year into your Roth IRA, which then grows tax free and can be withdrawn tax free. However, you have reason to never withdraw from your Roth IRA in your lifetime. This is because, before you die, you may designate an heir who will inherit your Roth IRA funds upon your death.
This heir must begin withdrawing from the IRA, but only in proportion to their current life expectancy. If the US Government publishes a life expectancy of 80, then a 7-year-old heiress must withdraw 1/73 of her inherited Roth IRA that first year, then 1/72 the second year, and so on. The Roth IRA continues to grow tax free for decades, encumbered only a bit by withdrawals.
An illustration of the magnitudes at stake is in order.
| Age | Invested Into Roth Total (Max) | Roth Total After Growth | Profit Due To Growth |
|---|---|---|---|
| 18 | $0 | $0 | $0 |
| 20 | $12,000 | $13,289 | $1,289 |
| 40 | $132,000 | $314,617 | $182,617 |
| 60 | $252,000 | $1,480,659 | $1,228,659 |
| 80 | $372,000 | $5,992,874 | $5,620,874 |
| Age | Required Withdrawal Annually | Roth Total After Growth | Equivalent Growth Rate |
|---|---|---|---|
| 7 | $82,094 | $5,992,874 | 5.53% |
| 20 | $197,834 | $11,870,053 | 5.22% |
| 40 | $765,556 | $30,622,240 | 4.33% |
| 60 | $2,962,460 | $59,249,202 | 1.65% |
| 79 | $10,713,819 | $10,713,819 | -100% |
What can be done in one lifetime simply does not compare to what can be done in two.
By age 60, your grandchild will have $59,249,202 to withdraw tax free. She will never need to withdraw more than the minimum each year, because these are already gigantic sums. All the while, your grandchild can put her earned income into her own Roth IRA. When she dies, her heir will inherit her Roth IRA to begin the cycle anew.
One remark is that the cycle must occur every other generation. It is important to pass on the Roth IRA to a young heir so that the minimum withdrawals are low for many decades. This allows the account to continue compounding in the meantime. If the heir were 20 years old instead of 7 years old, at age 60 the account balance would be half: a loss of $30,000,000. Had the heir been a newborn, at age 60 her balance would soar by $20,000,000.
Another potential issue is that you cannot contribute to a Roth IRA if your annual income exceeds $129,000. There is a workaround, however. You can make use of so-called backdoor Roth IRA contributions by investing in a traditional IRA, then rolling over the funds into your Roth account.
Even the best designed games often have an overpowered strategy. What would you give to have a $1,000,000 salary rather than a $100,000 salary? The same gains are within your grasp by applying these investing techniques. And by no means should you stop here. Read the rulebook. Devise new strategies. At the end of a lifetime – or two – it will be well worth it.