Wednesday, September 1, 2010

Part 3 of 3: The Stretch IRA – A Summary

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The Stretch IRA is a concept -- an example of how an IRA could possibly be stretched across multiple generations. And in the first two parts of this three part series I demonstrated just one way an IRA could be stretched, but by using two different investment vehicles – the Traditional IRA and the Roth IRA. In both Parts 1 and 2, the income that was generated and stretched across the generations was all made possible from just a $250,000.00 investment that was accumulated by the age of 70. Just to demonstrate how possible it is to accumulate $250,000.00 by the age of 70, here are 10 examples:
  • 1. Invest $91.00 per month for 45 years working at 6% starting at age 25.
  • 2. Invest $48.00 per month for 45 years working at 8% starting at age 25.
  • 3. Invest $24.00 per month for 45 years working at 10% starting at age 25.
  • 4. Invest $12.00 per month for 45 years working at 12% starting at age 25.
  • 5. Invest $1,646.00 one-time working at 8% at age 7.
  • 6. Invest $471.00 one-time working at 10% at age 7.
  • 7. Invest $135.00 one-time working at 12% at age 7.
  • 8. Invest $1,020.00 one-time working at 8% at age 1.
  • 9. Invest $260.00 one-time working at 10% at age 1.
  • 10. Invest $67.00 one-time working at 12% at age 1.
There are so many different ways accomplish this task, however, the trick is to teach these important money concepts and to inspire your other family members to continue this “family tradition” going forward and to in turn inspire their family members and so on and so on. There is nothing really stopping the beneficiary from taking their inheritance in one big lump sum as opposed to stretching it forward, so this has to be inspired, taught, understood and agreed upon by all of the people involved for it to work properly. By teaching the family members the powerful compounding effect of money over time by just choosing to take only the Required Minimum Distribution (RMD), the money can still have a chance to grow while you are making your withdrawals, thus spreading this money much further.

I want to share with you one more real extreme example of how an IRA could be theoretically stretched over 156 years and over four generations: A father named John started a family tradition by opening a Roth IRA for his son Billy at age 7. When Billy was age 27, he had his first son named Bobby. Billy immediately made Bobby the beneficiary of the IRA. Twenty-seven years later Bobby has his own son named Ben. Now Billy changes the beneficiary from Bobby to Ben. Twenty-six years later Ben has a son named Barry. Billy, at age 80, changes the beneficiary from Ben to Barry. Seven years later Billy dies at the ripe old age of 87. Barry, the beneficiary, is now only seven years old and has an IRS life expectancy factor of 76 years. So, Barry will now be forced to start withdrawing at least the Required Minimum Distribution (RMD) for the next 69 years, until the account is emptied. So, in this example the money lasts 156 years.

Now that was an extreme example, but in that example only the beneficiary would get changed to the youngest member of the family, so that money is only going to go so far. To make things really extreme, just imagine if each of the fathers were inspired to also do what John did by continuing the tradition of also starting a new Roth IRA for each of their own children at age 7 and teaching them to change the beneficiary to the newest member of the family and have them inspire the same concept to their children down the line. Theoretically that money would never end.

So, you can see that there are many different ways to possibly stretch an IRA and hopefully by now you understand the concept. In these uncertain economic times that we live in, you really need to be able to think outside of the box to be able to plan for your future, as well as for the future of your family. You not only need to have a plan, but also a backup plan in case things don’t work out the way you wanted them to. So, you need to know all of your options and have as many tricks up your sleeves as possible. This all starts with educating yourself and in turn passing your knowledge forward. Children are our future and should learn these important money concepts as early in life as possible. I hope you have learned something by reading this three part series and my wish is that you get a chance to share some of this information with someone else.

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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