Do you want to become a millionaire? Not in the game show but in the game of life.
You will agree with me that one of the secret of the wealthy is how they take advantage of tax breaks. Roth IRA is one of those accounts with awesome tax advantages.
As in all successful ventures, the foundation of a good retirement is planning.—Earl Nightingale
Table of Contents
Is a million dollars a lot of money?
Having a million dollars is not what it used to be. For example, $1,000,000 in 1950 now has the purchasing power of about $10,170,954.36 in 2017. That a whopping 9 million dollar difference in 67 years. More information about the effect of inflation here.
However, I still believe that real wealth building starts with making the first million dollars.
Making the first million dollar is the hardest
I am sure you have heard of that saying before. This is still true even for physicians for many reasons. Here are few reasons I personally think making the first million is the hardest.
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Debt is the enemy on the millionaire path
To have a positive net worth, you have to dig yourself out of your debt hole. For many physicians, we accumulate a lot of debt to get to where we are today. Don’t get me wrong, it was money well spent, or should I say well borrowed. I started with around 200,000 dollars negative net worth and we are now very close to zero. Thanks to extra shifts, early investments and curbing our spending. Yes! The homeless person on the street is likely richer than your doctor. Think about that for a minute. While some may be homeless, they most likely don’t owe 200,000 dollars in loans.
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You need Self-confidence to become a millionaire
Money and self-esteem are intimately connected. You have to believe you can become a millionaire to realize that dream. This is worse if you have the constant fear of not having enough. I for one, viewed millionaires as gods when I was younger. Billionaires are super gods.
We all have doubt, worry and anxiety about our finances. This affects how we build wealth. I employ you to change your belief on wealth.
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.-Winston S. Churchill
Good news for you! The first million have been known to boost self-confidence and the ability to earn more. If you can make 1 million dollars, then you can make 2. So follow me on that journey to the first million.
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Compound interest/inertia is an important principle to know on your journey to becoming a millionaire
After the first million, compound interest goes into high drive. I think of this as the law of inertia. Inertia is the resistance of any physical object to any change in its position and state of motion. Once the object starts moving though, it is more likely to keep moving unless stopped by another force. I know, I know. I sneaked in some physics there. But it applies!
In the beginning, it might feel like your money is not growing. But rejoice! For many people, once you have your first million, it takes about half that time to make the second million.
Here is a boggle head forum on what people think about doubling your first million.
You can become a millionaire and then become broke
The first thing to take care of, before accumulating wealth is to cure all your bad financial tendencies. Curb your spending! Learn from the rich people. For example, Warren Buffet once bought Bill Gates lunch at McDonald’s with coupons. The fact that you are rich does not mean you should not value a good deal. You don’t have to be a wasteful spender. If you want some entertainment, read the story about the coupon here.
There are countless people who have won the lottery and are now broke. Similarly, there are many athletes and celebrities who have made millions and are now also broke. These are prime examples, of poor financial literacy. Even, when handed millions, you will lose it overnight if care in not taken.
Roth IRA path to millionaire
Brief Roth IRA review
Roth IRA is a form of retirement account. You contribute after tax and it then grows tax-free. It is also tax-free when you withdraw the money at the appropriate time. This is my favorite account personally. It’s a win for everyone. It is even better for those who think they will be at higher tax bracket upon retirement – aka high income earners.
Roth IRA is appealing for many reasons. It helps you diversify you pretax and after tax money “buckets”. You have the 401k with pretax money, then the Roth IRA with after tax money. This helps to minimize the tax burden in retirement. Also for someone like me, who believes in leaving inheritance for children, with Roth IRA, you can leave assets to your children tax-free.
Just make sure you are not over the IRS limit. If you are above the limit, then read up about backdoor Roth IRA.
You are probably saying to yourself by now, show me the calculation and how to become a millionaire already. Here we go below.
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Financial calculations are fun
Chances are that you will not be investing in Roth IRA alone. But just for fun, let us do a calculation on how long it will take if all you do is contribute 5,500 dollars in Roth IRA every year.
Get out your calculator! If you faithfully contribute the maximum amount to your Roth IRA, which is 5,500 dollars per years, It will take less than 35 years to become a millionaire. I divide 5,500 by 12 to put the monthly amount of 458 dollars. If you start contributing at 14 and you manage to max the Roth IRA, you will be a millionaire by 50 years old. Not too shabby. Of course, our regular market assumption holds true – 8% average annual interest on your investment. You might not start at 14, i know, but start now and take advantage of your Roth IRA space. Read the post on time value of money to see why it is important to start earlier than later.
The fun part of the Roth IRA millionaire, is that you are really a millionaire. No tax when you withdraw it – you might have to wait till 59 years old to withdraw without a penalty but I’ll take it.
I make sure to contribute 5,500 dollars for myself and 5,500 dollar for my wife every year. That’s 11,000 of tax-free money invested every year. We backdoor it now of course, due to income limits. It might not look like much to you, but you will surely become a millionaire if you keep maxing your Roth IRA every year.
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Play around with my compound interest calculator here
I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
ImmigrantFinances says
I love the Roth IRA too. It is my favorite retirement account. It’s one of the best things Uncle Sam did for the individual investor. The Roth IRA can be used to leave a legacy for your children’s children by way of a Stretch IRA. This is a wealth building strategy whereby you can stretch the growth of funds in a Roth IRA potentially over 150 years or more, leaving behind billions in legacy, all tax-free. It doesn’t get better than that.
admin says
I love your vision! Billionaire idea is awesome. Hopefully our kids are responsible to keep building on it. Thanks for stopping by.
Hatton1 says
I am contributing to a Roth 401k myself. Other Roth money from conversions. More Roth less RMDs
admin says
Exactly. Wish I started at 14, but likely won’t be able to max it at the time. Thanks for stopping by. I see your awesome posts all the time on white coat investor.
Aditi says
What a post! Awesome..Loaded with lots of information..I agree, financial literacy is a must.
Thanks for sharing!
Today I Quit My Job says
I have a rollover IRA which turns out to be traditional. I guess I never really understood that a ROTH was tax free (after). Can you invest it how you choose in stocks etc as you can a traditional? I saved aggressively for my 401k when I just started my job and was making a lot more. I wound up taking a different job because I was just getting burned out after almost 10 years (less money, etc). It was okay and I was prepared for taking the cut. I somehow feel that I almost put too much towards retirement which is kind of far away and not enough in the current savings/growth plan. I manage my own IRA rollover and since starting maybe 7 years ago it’s up about 600%. If I had that same amount of cash in savings and had made the same investments, i’d be in great shape right now.
admin says
Yes. You can invest it just like traditional. You have all the same funds in vanguard to utilize for Roth IRA. Yes time value of money would have really helped you out a lot. That was an awesome return of investment! thanks to the bull run. It is still not too late, keep saving and investing. Focus on net-worth and increase it every year.
Anshu says
This post is really awesome and covers many aspects of becoming a millionaire.
xrayvsn says
Good luck on your financial path and you are absolutely correct that the first million is the hardest to get to but after that things go rather quickly (almost exponentially). Once I became completely debt free (paid off student loans and mortgage), all that money that went out the door to line other people’s pockets instead went out the door to work for me. And the more they worked, the more they recruited their friends who also worked. It is a great financial cycle when you get to this level (I called it my Capital Snowball in my post on my blog). It’s good to be on the right side of the lender-borrower equation
admin says
Thanks. I am still at the beginning stages but I have high hopes. I see you are in the pay off mortgage camp. I am still renting for now, we shall see if I will change my stance on that in the future. Having more cash flow after debts are all paid for, sounds like a sweet position to be. I am glad you have reached the capital snowball stage. I will definitely check out your post. Thanks for stopping by. Well appreciated to have a more experienced blogger stop by 🙂
Bee 🍂🍂🍂 (@makeeatrepeat) says
Great post! It’s nice reading a finance post as I’m from the UK where people don’t talk about money. You have made lots of great points and I have learnt some tips so thank you 😊.
Bee | makeeatrepeat.co.uk
admin says
Our view of money is influenced a lot by our cultural backgrounds. The best way to improve one’s knowledge on anything is to learn about it. I am glad you found the content helpful. Thanks for stopping by .
Bloglove2018 says
Terrific post with a lot of great information! Giving me a lot to think about & potentially change! Thank you for sharing!
admin says
I am glad the article is of value to you.
Melanie says
The homeless person might be wealthier on paper, but it’s much easier for a doctor to become solvent than the homeless person!
Great post, I kind of put my own retirement funds on autopilot (through my employer only) and have come to realize that was a pretty bad decision.
https://www.melanie.city/what-is-adenovirus-inside-the-killer-cold/
admin says
Thanks for commenting. The reason I said that was, despite being knee deep in debt, people view doctors as wealthy. That is not the case. For many, after earning the first real paycheck at 32, the next 5 years is spent paying off loans. Starting at 37 to invest is very late. If the homeless person got a good job, they could become rich faster than a doctor.
Bummer on your investment. That is actually a good way to start, however, you have to diversify and also invest outside of work. I am sure your horizon is long and you can recoup.
living says
I’m a nurse and in the road of fixing monetary errors and working for higher financial goals- saving more, spending less and earning a lot. Glad I have come to read this blog post of yours. It’s inspiring. It may be hard to have a million dollars for now but with dedication and commitment in reaching the goal, it is surely very soon to realize..
Adebayo says
Thanks for stopping by and taking the time to comment. Multiple small changes make a big difference in finance.
living my says
I’m a nurse and in the road of fixing monetary errors and working for higher financial goals- saving more, spending less and earning a lot. Glad I have come to read this blog post of yours. It’s inspiring. It may be hard to have a million dollars for now but with dedication and commitment in reaching the goal, it is surely very soon to realize..