Most folks need substantial assets to support themselves while in retirement. With a current monthly average benefit of around $1,559, Social Security is not going to be enough for you to live a comfortable and happy retirement.
Fortunately, there are some tax-advantaged retirement accounts like IRAs that can help. These accounts can be powerful portfolio builders, as a new report from June has revealed: It seems more people, including Warren Buffett’s investing deputy Ted Weschler, have expanded their IRA accounts to hundreds of millions, if not billions.
Weschler’s Roth IRA was around $264 million in 2018. Meanwhile PayPal co-founder Peter Thiel, has around an account that started with $2,000 in 1999 and now has around $5 billion.
How wealthy people do it
So how do super wealthy people do like Weschler has and amass so much money, when contribution limits are low and their incomes are so high?
Well, they might be using Roth IRA conversions — taking normal IRA accounts and/or 401(k) accounts and changing them into Roth IRAs. You must pay taxes on the money converted when you do this, but after that, the money grows with the prospect of never getting taxed again.
(Also not that 401(k)s have much higher limits, so they can grow fatter than an IRA account. The 2021 limit for 401(k)s is around $19,500, plus $6,500 for people 50 and older, for a total of $26,000 being possible.)
Wealthy people are often well connected to particularly good investment opportunities. For example, they can put money into a business that is still young and not yet being sold on the open markets. And if they use their self-directed Roth IRA, they might be able to park their shares of future hugely successful companies inside it.
Imagine Netflix, as one example, which began trading after its IPO back in 2002. Some early investors might have been able to get their shares for a split-adjusted $1 or $2 back. They are now worth about $625, representing a 632-fold increase. That would be enough to transform a $6,000 investment into around $4 million.
If you can buy shares of such a huge outperformer before it hits the market, you might get it at much cheaper prices, getting even better gains in the future. This combined with the tax-free nature of your Roth-IRA account could make your retirement a dream come true.
Author: Steven Sinclaire