I was playing around with my PC the other day and came upon an astonishing fact of arithmetic. As far as I know, nobody has pointed this out before in these terms, so what you're reading now is New News, with my compliments.
It has to do with the number of years we work and the age at which we can retire. Conventional wisdom says we work for about 45 years (age 20 to age 65, say) and then retire on a reduced income - a pension or, if we really want to live dangerously, on the grotesquely misnamed "Social Security".
Well, regular readers of this column know that this is not the place to read about conventional wisdom, so here goes with my discovery.
It fits the person who, throughout his or her working life, has a steady wage or salary. I haven't worked it out yet for those whose income continually rises, but think it may be even better for them. Let's just stick with the many who (after a few years' apprenticeship, perhaps) work for a wage that goes up no more than the cost of living.
It then rests on two assumptions:
(1) that he or she systematically puts aside 5% of that income for retirement. To do that, you may have to get out a pencil and paper and work out where 5% is being wasted, and then stop spending that waste and make sure you don't cheat. Everybody wastes at least 5%, right? Then,
(2) that saved 5% is invested in mutual funds that grow at 15% a year compound. Now, 15% is a bit better than the average for the whole stock market, and it does mean 15% above whatever may be the rate of inflation, so that part will take some work. It won't happen just by buying government bonds. But it can be done, and there is a large number of experts out there ready to help anyone do it. No special qualifications are needed.
The astonishing result is that this regular saving program, with compounding at 15% a year, builds up a retirement nest-egg over 21 years to yield (at the same 15%) an income on its own equal to (or a little bit better than) the wage or salary that has been earned.
In other words, after 21 years of doing the above, you could retire and enjoy exactly the same income as the day before you retired, yet never do another day's labor; and that is true whatever your level of earnings.
This discovery could be massively important to every reader, especially those in their early 20s. Someone following this strategy from the age of 20 could retire at 41. It's an arithmetic fact!
It's so astonishing that it's worth working through an example. John earns $500 a week, and realistically expects that not to grow much. He carefully watches where the money goes, so he can set aside $25 a week. That's $1,300 a year.
He opens an investment account with a broker like Charles Schwab, and spends an hour a week making sure that his portfolio performs satisfactorily, on average by 15% a year. He might subscribe to an investors' newsletter, like those of Mark Skousen or John Dessauer, and do even better; but we'll say 15%.
After 21 years (age 41) his portfolio will have grown to $177,621. John quits work to go fishing (or whatever else excites him) and lives off 15% of that $177,621... which is $512 per week, slightly more than he earned from his former employer the previous week! And provided he continues closely to monitor his investments, that will go on indefinitely. AND, his kids will inherit!!
But suppose he so enjoys his work that he doesn't want to retire at 41? - better yet. He has the choice of letting his retirement nest-egg go on growing undisturbed (by age 50, that $177,621 will have grown to over $649,994, offering him a retirement income of $97,492 a year or more than 3 times his wages to retire on!) or he can start drawing out some of his nestegg while continuing to work, so greatly raising his standard of living, or...
Point is, he's in control. He has the power of choice. Instead of being just a "wage-slave" and then an SS junkie, he has some real options at his command.
A few readers may wonder about the morality of retiring at 41. If everybody did it, wouldn't the nation sink into an abyss of idleness?
Far from it! That's because what our friend John is doing is to live like a capitalist; he's putting his money to work productively. In earning 15% a year, he is lending it to people who can make with it even more than 15%.
And if everybody did that (sadly, they won't) then the whole nation would enjoy a massive increase in prosperity because money would be being employed where it could earn the most wealth. Millions of people, each one controlling his own property - that's what REAL capitalism is all about... in contrast to today's socialism, in which government grabs every cent it can and pours it down the sink-hole of "entitlements" and other places you and I would never spend it.
It's one aspect of what Adam Smith called the "invisible hand" of free capitalism. Everyone (John and all his friends) are conducting their affairs strictly for their own benefit - selfishly, if you will. Yet in the very act of doing so, whether they want to or not and whether they care or not, they are necessarily bringing benefit to society as a whole.
That's one of several reasons why unregulated capitalism has been rightly called the only truly moral economic system yet invented.
|© Copyright Jim Davies 1999|
Jim Davies lives in New Hampshire,
and enjoys contemplating which way is up.
The above is Edition # 183
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