28-Year-Old's Genius Retirement Plan
41sA young person's smart financial question sparks interest and relatability among millennials and Gen Z.
▶ Play ClipAI Summary
In this video, a financial advisor responds to a 28-year-old's question about dividend investing as a passive income strategy within a Roth IRA. The advisor explains what dividends are, how they work in a Roth IRA, and advises against using them as a primary investment strategy, recommending instead a simple approach of investing 15% of income into four types of mutual funds.
Chapters
[00:00]
Question from James
James, 28, on baby step three, asks about dividend investing for passive income before age 60, specifically how dividends work in a Roth IRA and tax implications.
[00:41]
Definition of dividend-paying investments
Dividend-paying investments are typically blue-chip companies like General Motors—large, stable companies that distribute profits to shareholders as dividends.
[01:22]
Dividends in a Roth IRA
Dividends inside a Roth IRA stay tax-free until age 59½; withdrawals before that are penalized and taxed. Dividends are reinvested automatically.
[01:55]
Recommended investment strategy
Instead of dividend investing, the advisor recommends investing 15% of income into four types of mutual funds: growth, growth and income, aggressive growth, and international.
[02:11]
Bridge investing for early retirement
If you need income between 55 and 59½, consider bridge investing using a taxable brokerage account with index funds, which are taxed upon withdrawal.
[02:40]
Passive income misconception
Passive income is only relevant in retirement; you don't need it before then. Dividend stocks are the calmest but have the lowest rate of return among the four types.
[03:09]
Personal example
The advisor, aged 61, achieved wealth by buying real estate for cash and investing in the four mutual fund types in a 401(k), without dividend investing.
[03:23]
Simplicity is key
You don't need fancy strategies; simple investing can make you a millionaire or multimillionaire, though not a billionaire.
The advisor concludes that dividend investing is unnecessary for building wealth before retirement; a simple, diversified mutual fund approach is sufficient and more effective.
Mentioned in this Video
💡 Key Takeaways
📊
Tax-free dividends in Roth IRA
Clarifies a common misconception about tax treatment of dividends in retirement accounts.
01:22
🔧
Simple investment strategy
Provides a clear, actionable alternative to complex dividend strategies.
01:55
💡
Bridge investing concept
Introduces a niche strategy for early retirement income that is rarely discussed.
02:11
⚖️
Simplicity over complexity
Reinforces that basic investing can build wealth without gimmicks.
03:23Full Transcript
[00:00] Today's question comes from James in Wyoming. He says, I'm 28 years old and I'm on baby step three. I'm looking ahead to baby step four where my fiance and I will invest 15% of our income into
[00:16] retirement. What are your thoughts on dividend investing? I was thinking after the house has paid off, the only thing better than no payments is having passive income from our investments covering our living expenses. I want to achieve this before the age of 60
[00:29] when we can start withdrawing from our retirement. Is this a good way to allocate our 15%? And if so, how does receiving a dividend work with a Roth IRA? Is it still taxed?
[00:41] Great questions from a 28-year-old. I'm impressed. Very good. Very good. Well, a dividend-paying investment would be a, typically what's called a blue-chip company, a large company, okay, like a General Motors, okay?
[00:54] they're not usually very exciting in their price changes up or down, but they make a lot of money. And so when they make money, and when you own a share of stock, you're one of the owners of the company.
[01:07] You own a tiny little piece of the company when you own one share of General Motors stock. If they make a profit and they decide to distribute that profit to the owners, that's called a dividend. And so a dividend-paying investment would typically be large company stocks
[01:22] that are paying out their profits, and are fairly predictable on that, and people buy them for that and that only. If that's in a Roth IRA, the dividends stay inside the Roth IRA until you're 59 1⁄2.
[01:35] It's tax-free like anything else is. And what you would do is flip the dividends and they reinvest back into more stock is what happens inside of that You cannot pull anything out of a Roth IRA before 59 half without getting penalized and taxed And so we not going to use that for something to get too early
[01:55] And I really wouldn't do it. I just, if you, if you want to invest, I would just do 15% of your income into the four types of mutual funds. We talk about growth, growth and income, aggressive growth and international. If that gets too big and you're getting close to 50 years old and you
[02:11] don't have any money to support you between 55 and 60 or 55 and 59 and a half, then you might just start with something like some index funds. And that's called bridge investing at that point. Which is a taxable brokerage account where you just invest and it's all going to be taxed when
[02:26] you take it out. But that could be a way. It's a taxable mutual fund. Yeah. That's what it is. So with your Roth IRA, just leave it in there. It'll be reinvested. It'll still help your money grow. But I wouldn't worry about this as a passive income strategy. Yeah. You've been reading too many websites.
[02:40] Passive income is great when you're in retirement and you get the passive income from that investment. From that Roth IRA, and it's a tax-free income. You don't need passive income. And typically, these are the calmest of the four types.
[02:55] The growth, growth and income. It's a growth and income type stock that would be a dividend paying. The end income part. And that's those blue chip, big dinosaur companies. And it's the least exciting, the least rate of return.
[03:09] It's the lowest rate of return of the four types we talk about and that I own. So I'm 61. I did none of what you're talking about. All I did was buy real estate that I pay cash for and invest in those four types of mutual funds in my 401K.
[03:23] And really, that's really all you need to do if you, you know, up to tens of millions. I mean, you know. You don't need to get fancy. It won't make you a billionaire, but you won't be broke, and you'll be a millionaire and a multimillionaire.
[03:35] You'll end up somewhere in between. Absolutely. Absolutely.
