You Become A King When Your IRA Hits $150,000

One of my favorite quotes from famous UCLA basketball coach John Wooden is that it is not our performance in relation to others that counts, but rather, our performance in relation to our highest potential that matters in the end. I don’t think anyone wants to reach a point at the end of their lives when they realize that there is a large gap between who they are and who they could have been.

Whether we want it to be the case or not, money plays a big role in determining whether or not we can maximize our potential. After all, Walt Disney had to spend big chunks of time dealing with rejection while raising capital to build Disneyland, and all that time he spent begging for funds represents time he wasn’t able to spend doing what he loved by further developing characters like Mickey Mouse, Snow White, and Mary Poppins. Who knows, maybe he would have created more timeless characters back in the day if he did not have to spend his time worrying about the funding for his animation studios.

The whole point of money is that having it allows us to live the life we want rather than the life that “society” tells us we should want. If you have $10,000,000 in a global custody account, you don’t really have to put up with much petty bullshit from others in life. In fact, that’s the reason why I often speak in terms of “financial independence” rather than using the word “retirement” when I write my articles. I don’t write these articles so I can help you reach a point where you sit on a couch decaying watching Judge Judy all day until you die. That’s not why I’m here. Rather, I write about financial independence so that you can reach a point in your life where you can pursue dreams on your terms without being constrained by the financial side of the equation. It’s about reaching a point where you spend your days doing work you love rather than work for the sole point of receiving a paycheck.

The question to focus on, then, is this: What can you do to reach a point in your life where the financial side of the equation puts you in a position to have the financial means to make decisions in your life without being a focus?

Charlie Munger, the 89 year-old Vice Chairman of Berkshire Hathaway, is famous for saying that “the first $100,000 of savings is a bitch, and the fun begins after that.” Because he originally said that in the early 1990s, I updated the figure to $150,000.

What makes $150,000 so important? That’s the point when your money truly starts to work for you, and you start getting richer in a meaningful way just for staying alive.

Think of it like this—if you could put together a portfolio of dividend stocks with an average yield of 3.75%, you get $5,625 in dividend income per year, to say nothing about the capital appreciation you’d likely receive as well. Your money is making $15 per day, or about $460 per month, at that point. Even if you could never add to your investments again, the mere checking of the “reinvest dividends” box on your brokerage statement would be enough to propel you in the direction of permanent, automatic wealth creation.

Life gets more fun at that point because you do not have to sell your time in order to make money—you also have business ownership interests that are chugging out profits twenty-four hours per day. When you originally reach that $150,000 at 3.75% mark, you’ll be making over $5 per night while you sleep. And the best thing is this: the money automatically goes up each year through the power of reinvestment without any further effort on your behalf.

I’ll use Conoco Phillips as an example to illustrate the point, because it is a high-quality company with a yield close to the portfolio average of 3.75% that I used in my assumption (at the time of writing, Conoco yields 4.25%, a bit more than the example).

If you put $150,000 into Conoco stock, you’d have 2,300 shares generating $6,348 in annual dividend income. By reinvesting your shares back into Conoco stock, you’d pick up about 98 more shares over the course of the year (giving you a total of 2,398) shares. If the $2.76 annual dividend grew 7% to $2.95 per share, you’d have $7,074 coming your way in annual dividend income. Look at what just happened there—one dividend increase, combined with four acts of dividend reinvestment, was able to raise your annual income from $6,300+ to $7,000+. This is why dividend investing gets fun once your money starts working for you. You just chill by staying alive and watching the growth in dividend payouts of excellent companies intermingle with the dividend payouts that you choose to reinvest. That’s the sure path to wealth creation.

If you want to put yourself in a position to see automatic increases in cash flow like that, I’d construct a plan to get to that $150,000 mark as quickly as possible. The math of getting there might look something like this: save $550 for 13 years while earning 8.25% on your money. That means saving $6,600 per year. If you are bringing home $50,000 after taxes, that implies a long-term savings rate of 13.20% to get there. You can play around with the variables as necessary to reflect your situation.

Even though I somewhat arbitrarily picked $150,000 as the point where your finances start to take off, the point is to focus on turning the dollars in your pocket into little soldiers that go into battle on your behalf to bring home the prize on a regular basis. Every $100 in your pocket can easily be turned into $3.75 in annual income that automatically grows into $4.01 income the next year without any further effort on your behalf. Every single thing about successful personal finance is about taking the surplus of what you generate from your labor and transforming it into something that automatically generates cash.

Originally posted 2013-07-29 07:14:37.

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One thought on “You Become A King When Your IRA Hits $150,000

  1. Quyen says:


    John Wooden retired a few years before I attended UCLA in 1982. The Bruins have never been the same after his retirement. That is probably why I, as a basketball fan and player myself, only went to the game once during my seven years at UCLA (both undergraduate and graduate).

    Set basketball aside… I stopped contributing to IRA this years because IRA accounts are too restricted on option trading. As smart as you are, I am sure you can find the power of option. It can be used to manage entry point, as well as generating extra income above and beyond the dividends, the capital appreciation, and whatever passive income we can imagine (e.g., rental).

    I know it is hard enough for ordinary people to accept investing in stocks; it is even harder for folks to think about options, as it is deemed "dangerous." Yet, any tool is as useful and dangerous – a knife is a kitchen essential and a weapon.

    You like to use energy stocks in your articles. I like energy too; it is my second favorite sector. Although technology makes it possible for us, human, to find and extract energy (mostly oil) from the earth, I still believe that at some point in time, the earth won't replace the oil as fast as we consume. Actually, I believe that the earth is not replacing oil&gas as quickly as we consume (we find more oil&gas thanks to new technology). By that time, fossil fuel price will shoot up enabling energy companies (with decent reserves) to profit more. However, this will only last until the reserve is gone. This may or may not happen in our lifetime, but the possibility is there.

    … I am thinking about exit strategy on energy sector, but the more I think, the more I am convinced we don't need one (maybe keeping an eye on renewable energy and technology as we go), because when we see consumption is greater than replacement, the world is doomed. Inflation will shoot up along with energy price; wars will break out among the world power to secure energy sources; smaller and weaker nations may be wiped out either by war or hunger (no energy = no food). With our military power, I think we will survive at the expense of others. Nevertheless, even hardship will be seen within our borders when the time comes. I hate to watch "Doom's Day Castle" shows, but maybe acreage in the midwest and ammunition are my next investment.

    Love to know what you think on the topic.


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