“With money in your pocket, you are wise and you are handsome and you sing well too.” – Yiddish proverb
Let’s say my friends could afford to put $20,000 into such a fund. And let’s further assume that the fund provided a net return of 8% — which is lower than the stock market has performed historically. By dividing 8 into 72, you arrive at the number of years it will take for an investment to double at 8% — in this case, nine years. Let’s see how that $20,000 grows.
On his ninth birthday, their child will have a nest egg of $40,000. By the time he is 18, that will have grown to $80,000. By age 27 — just as he’s getting settled in his first serious job — he’ll have $160,000 stashed away. Nine years later, still a very young man at 36, he’ll be worth $320,000 (even if he’s accumulated nothing else). Just as he’s hitting his midlife crisis, at 45, he’ll be comforted to know his net worth is $640,000. At 54, still young by my standards, he’ll be a millionaire with a $1.3 million net worth. At 63, he’ll have $2.6 million.
At 72, he’ll have a very comfortable retirement account of $5.1 million. If you are unfamiliar with “the miracle of compound interest,” this number may be startling to you. But it illustrates the way great wealth is accumulated — not by huge (i.e., lucky) 100% or 1,000% returns but by reasonable ROIs that are allowed to compound over time.
In terms of what you can expect to get from the stock market, 8% is a conservative target. The historic number is 10%, and it would not be unreasonable to expect a 12% return if you followed the ETR approach to investing with discipline.
That said, let’s take a look at what would happen if my friends got a 12% return on an initial investment of $20,000 for their child during his lifetime. (I have to thank my friend and doctor Al Sears for this particular example.)
At age 6, he’d have $40,000; at 12, $80,000; at 18, $160,000; at 24, $320,000; at 30, $640,000; at 36, $1,200,000; at 42, $2,400,000; at 48, $4,800,000; at 54, $9,600,000; at 60, $19,200,000; at 66, $38,400,000; and at 72, $76,800,000.
That’s amazing, don’t you think?
A one-time investment of $20,000 invested over a normal lifespan would yield a fortune of more than $70 million dollars — and without any extra money invested or a single year in which the returns exceeded 12%.
What can you take from this?
First, it is possible to create enormous wealth with a one-time investment of a “normal” amount of money.
Second, the longer you hold off on cashing in your nest egg, the faster your wealth compounds. In the case above, for example, the child’s wealth was increasing at the rate of about $6,600 a year between ages 6 and 12 and increasing at the rate of more than $6 million between ages 66 and 72.
So what should you do?
If you have a child or grandchild you’d like to create a retirement fund for, consider a lump-sum investment now in an index fund. (I wouldn’t tell the child about it. It would probably hurt him to know that there was “money waiting” for him.)
Put the investment in trust for him and provide some directions for its dispersal. To have an even greater and more meaningful impact on his life — especially his pre-retirement life– teach him these principles and get him into the habit of investing on a regular basis.
My strongest recommendation here would be to use the Seeds Of Wealth program, which my brother developed specifically for this purpose. It will teach your children (or grandchildren/nieces/nephews/etc.) not only good saving habits but also good spending habits — and it will instill in them an attitude about money and a knowledge of it that will make them financially safe and secure throughout their lives.
Finally, consider how this miracle of compound interest affects you personally. If you don’t right now have enough money to retire on, the single most effective thing you can do to be able to retire one day is to start investing today. Every dollar invested today is worth more than the same dollar invested tomorrow.
So don’t put off your investing plans.[Ed. Note. Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]