Can you imagine how much there is to gain from driving a paid for car? Ever since I started investing, I’ve been thinking about what the possible returns are, and how worthwhile it is to focus my intention on investing in quality mutual funds inside tax sheltered accounts. Since my car will be paid off by next summer, I decided to run the numbers and see what would happen if I did nothing else other than putting my $420 a month car payment directly into a mutual fund Roth IRA.
According to this calculator, if I invest $4000 a year (the maximum contribution in a Roth, and noticeably less than $420 a month) into a mutual fund with a 12% rate of return inside a tax free Roth IRA, when I turn 65 I will $3,064,000.
If I continue to earn 12%, I can draw the interest of $360,000 (tax free!) every year and never touch the principal. Can I live on $360,000 a year? I think so.
But what if I’m wrong? What if something happens, and the market doesn’t do as well? If I only earn 8%, then when I retire at 65, I will have about $1 million, and I will be able to draw $80,000 a year. A little less exciting, but still probably quite reasonable.
And all this is by doing nothing but putting my car payment into a Roth. I could do that without our income ever going up, which it almost certainly will once hubby finishes grad school (well, it better anyway!). I could do that without sacrificing any lifestyle we have now. In fact, since $4000 a year is less than $420 a month, I would actually have a little more disposable income each month. And truthfully, chances are I will have at least some kind of a teacher pension by then, and at least one if not both of us will have some kind of a 401(k) of 403(b) with an employer match.
Now of course there are some other issues here. I will, eventually, need another car (although, if I get my way that’s at least 6 or 7 years out). We are eventually going to buy a house. But again, our income will go up and we just have to decide not to do either of those things until we can afford to without stopping that Roth contribution.
I would recommend thinking about diversifying your taxes when both you and your husband are employeed. Think about both traditional and Roth IRAs. Or a 401(k) type plan. Then you pay part of your taxes now, and part later. Since your income is probably lower than it will ever be right now, you should try to max out your Roth. Just my advice...not as thought it's worth much.
ReplyDeleteThanks for the suggestion! I will absolutely take it into consideration. I am totally new at this, so I'm glad to learn.
ReplyDeleteYou notice the big difference between the 12% and the 8%... you suddenly dropped to one-third of your money due to a couple of percentage points. I don't see any inflation factored into this, which is going to make the $80,000 seem small in comparison. In 30 years, $80,000 will have the buying power of around $32,000. You might find that a little tougher to live on. So yes, you can do well with those retirement accounts, but consider this an extra little bug in your ear to become complacent and think your job is done with an IRA.
ReplyDeleteInteresting that most of the comments so far revolve around points of detail about the 'pot" you will have at retirement age, while no one addressed your real point ... Americans can save a _lot_ if they get off the kick of buying a car every couple years.
ReplyDeleteSome years back ... more thna I want to say ... there was a fellow who wrote an excellent book called, IRRC, "Why Trade It In?". His premise was that the 'conventional wisdom" that tells us that after 4 or 5 years the maintenance on a car outweighed the costs of a new one was wrong thinking.
He was right then and today he would be even more right. Today's cars are far better engineered and built than cars of 20 or 30 years ago and can easily provide several hundred thousand miles of safe transportation. Yes, they will require periodic maintenance and replacement of wear out items like ties , batteries, etc., but there is no way that four Michelins and a DieHard every 3 years will equal a $420 car payment for 36 months ... much less the loss of the earning power of that $420 pa intelligently invested.
Your case is sound, don't let debate about fine points of inflation in the future deter you from a worthy goal.
You're very wrong. First, as our government is bent on destroying the dollar, and stocks and real estate are tanking- Plan to be lucky to even get a 3% money market return. but most likely if you have money in stocks or real estate you will most likely lose. Then, since the current inflation rate right now is a REAL 10% a year, you need to deduct that as well. Try your calc again with these figures that are REAL and you will be surprised. PS. I am so sick and tired of all the people who tell you how much you will have in 30 years, but ALWAYS leave out the little fact that in 30 years your actual buying power will be MUCH LESS do to inflation. Get Real bro. fundys.com
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ReplyDeleteGreat posting and it is too bad that more people won't read it and act now.
ReplyDeleteAnyone can be a millionaire in this country, simply by CHOOSING to save more and spend less.
But most of us lease new cars, spend $100 a month on cable or a cell phone plan, eat out at bad chain restaurants, and then put it all on a high-interest-rate credit card, so we can get "airline miles".
In the coming decade, the Baby Boomers will retire en masse and will be expected to live on their savings. The 401(k) Generation won't have a defined benefit pension plan to rely on.
And it will be a mess, let me tell you!
You note that you will "eventually need a new car" and this is true. But you can minimize this cost by buying a late-model car (1-3 years old) with less than 50,000 miles on it, and then driving it forever. About one quarter the cost of leasing a car.
And if you can avoid "status" cars (drive a Toyota instead of a Lexus) the savings are even greater.
But most folks think, "Hey, it's 'only' $500 a month, that's no big deal" - but it is a big deal, over time and with compound interest. And many of these same folks are not saving for retirement!
Thanks again for a great, insightful posting.
One underlying key here is the way we invest our money and where we invest it. The best-case scenario is that we still receive some money out of the returns, starting from the very year we retire. That makes our life secure after the working years. But reaching the retirement age allows us to travel, do things we've been wanting to do, or consider settling at a retirement community.
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