April 25, 2008, 6:00 am

The Power of Systematic Investments

by: The Financial Blogger    Category: Investment, Market and Risk
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Building a nice investment account of your retirement is a goal that many people have. Unfortunately, most people don’t really take action in order to have enough money to retire at 55 or 60. They think the government or their pension plan is good enough to guaranty a golden retirement. In fact, I think that the only person you can really trust is yourself. This is why you need to start to think about retirement early in your life.

 


 

Going Up


One of the best ways to accumulate money is the use the “pay yourself first” cliché. Finance is like a hockey game, it is with cliché such as “we must shoot as many times as possible” that you can win!

 

When we combine the power of compounding interest with the power of systematic investment, we are absolutely sure to become millionaire one day. The problem is that we need to start young in order to become rich faster 😉

I do random calculation all the time since I started as a financial planner. You should see people’s face when they realize that they can get 2M$ in their pocket by the age of 65. This is something they would have never thought to be possible.

So here’s a great example to prove my point. Let’s say that you are 30 and you plan to retire at the age of 60. That leaves you exactly 30 years to get enough money in order to realize your dream.

You would need to put $1,000 aside per month at 6% (so 8% minus a 2% inflation rate) in order to get 1M$ at retirement. So 360K of capital over 30 years will put you in a millionaire’s seat.

Then, if you get lazy and wait 5 years and start putting money aside at 35, you would need to put about $1450 a month to get to the exact same result. Therefore, you would not only increase your monthly payment but also the amount of capital. So at the age of 35, you would need 435K over 25 years to get your million.

I did the calculation for my own situation too. At the age of 26, I must put only $708 a month in order to create my million. As I am putting only $400 a month in my Smith Manoeuvre I am short of $308… Time is surely rough when you have a young family and a full mortgage on your back!!

 


 

 

image source: flickr

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Comments

I too was extremely enamoured by these calculations. There is also a good one to emphasize the cost of delay. Compare two people, one person socks away $x/year between ages 20-30 then stops. The other one waits until after 30 to contribute, then contributes the same $x/yr UNTIL RETIREMENT. The first person will be wealthier.

I’m often rebuked because people tell me that the closer people are to retirement the less risk tolerant they are. I always correct them because if they are close to retirement then, unless they’ve thought ahead, then they will have to be very risky to make it. Young people who start at age 20 or earlier don’t have to be very risky at all due to compounding and time. That’s the opposite of what most people advise, but it is the correct way of looking at it.

by: The Financial Blogger | April 26th, 2008 (7:39 am)

CR:

We made some calculation at the bank and, roughly, the 2nd guy would have to put twice the amount per year to compensate the fact that he waited 10 years before putting money aside. If you have the possibility to put money aside young, don’t underestimate the outcome you could get!

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