Retirement

# Repeat for Emphasis – HumbleDollar

Take a look at this article on HumbleDollar. You will find it enlightening and entertaining. Compounding is a powerful tool often underestimated by savers.

The message is simple, save even a little and save early to give your money as much time as possible to work for you.

Another example: Suppose you started with one penny on the first day of the month and then doubled it each day—to two cents, then four, then eight and so on.

The results are similar to the paper experiment: After 10 days, you’d have \$5. After 20 days, you’d have \$5,000 and, after 30 days, you’d have more than \$5 million. While entertaining, these examples are so extreme that they’re of little practical value. But they carry an important lesson: The path to improvement in any domain does not require swing-for-the-fences, Herculean efforts. It requires only small steps done consistently. This is the meaning of “atomic habits.”

The problem is, we’re just not very good at doing compound calculations in our heads. We tend to think more linearly. Ask people to guess at the paper folding question, and typical answers will be in the range of three feet. Answers to the penny question normally fall in the range of \$1,000. Unless you work out the math step by step, it’s very hard to make an estimate that’s anywhere close to correct.

Categories: Retirement

### 5 replies »

1. JaCK b says:

It is claimed that Albert Einstein once declared compound interest to be “the most powerful force in the universe.” I think it’s true that many people don’t understand the effect of compounding or exponentiation. I also think that some of the examples in the article are misleading as in the doubling of the amount saved daily starting with a penny or folding a piece of paper in half many times. These examples would equate to a 100% increase at each compounding period which in the case of the penny would be daily and return an astronomical rate of return on an annual basis.

The true benefit from saving has to be related to the amount of return on investment minus the effect of inflation over the same period. Simply put, if your rate of return matches the rate of inflation you are no better or worse off at the end of the period. Your principal plus interest will still buy the same amount of good or services it could buy at the beginning of the period.

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• BenefitJack says:

Agreed. Maybe one exception – the impact of taxes. So, if your taxable investment rate of return matches the inflation rate, your purchasing power will be reduced by inflation. Then, of course, there is the loss of enjoyment of the good or service you could have had.

Simply, the taxes, the uncertainty, the inflation and other aspects of our society sometimes work against savers and investors.

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2. Atossa says:

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Yesterday on FOX Business News channel, they were discussing the difference between the US economy and economies of other nations. One of them said the US economy is 70% consumer based. For me that spoke volumes why both the media and the government promote individual spending over individual saving. Americans spending like there is no tomorrow and going into debt to do so is driving the economy… which is also why they want to keep interest rates at historic lows [lower rates = more reckless borrowing and spending.]

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3. BenefitJack says:

Rule of 72 baby – take the interest rate (the divisor), divide into 72 (the dividend), and the result (quotient) is the number of years it takes money to double in amount at that interest rate (ignoring taxes). So, at 12%, money doubles in about 6 years. At 8%, money doubles in about 9 years. At 6%, money doubles in about 12 years.

or

Rule of 72 “in reverse” – take the inflation rate (the divisor), divide into 72 (the dividend) and the result (quotient) is the number of years it takes inflation to half the purchasing power of your money.

Grandchild born today? Invest \$1,000 at birth in a tax deferred account, achieve a 12% rate of return, \$1,000 becomes \$2,000 after six years, \$4,000 after 12 years, \$8,000 after 18 years, \$16,000 after 24 years, \$32,000 after 30 years, \$64,000 after 36 years, \$128,000 after 42 years, \$256,000 after 48 years, \$512,000 after 54 years and \$1,024,000.

Issue: Is 12% possible? Yes, but not likely. If you look back over the past 60 years, from 1959 to 2018, the average annual return of the S&P 500 (including reinvested dividends) was about 9.7%. However, if you look at the 36 year period from July 1, 1982 to June 30, 2018, you get 12.1%.

Issue: Impact of inflation? No one has a clue what \$1MM will be worth in 60 years. Go back 60 years to 1960, some estimate there were about 80,000 millionaires in the US out of about 180 million Americans – about 4 basis points or .04% of the population. In 2018, the best estimate I saw was about 9.7MM millionaires out of a population of 320+ million Americans or 3.03%. Say we continue on this path and the percentage of Americans with \$1MM increases to 10% or 20% of the population in 60 years, by 2078. I know which group I want my grandchild to be in – don’t you?

Or think big. Use a Roth 401(k) and/or Roth IRA vehicle and leave instructions to pass the money down for 10 generations – a la Ben Franklin.

In 1785, French mathematician Charles-Joseph Mathon de la Cour wrote a parody of Franklin’s “Poor Richard’s Almanack” suggesting a person could leave a small amount of money in his will to collect interest over 1 – 5 centuries with the resulting astronomical sums to be spent on impossibly elaborate utopian projects. Franklin, who was 79 years old at the time, wrote back to thank him for a great idea and to tell him he had left just such a bequest to each to his native Boston and his adopted Philadelphia.

For Ben to take such action, he had to believe in America’s future. If you are a parent, obviously, you too believe in a future – for America and your son or daughter. Some of you may even believe your child will achieve one version of the “American dream” – where a child is better off than her parents.

You can create a financial legacy. Time may be your most valuable asset – plus the optimism that Ben Franklin had about the future of America. For you, that would be the future of your descendants. Can you look beyond … just in case history does repeat itself?

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• JRATT says:

BenefitJack – I always enjoy reading your posts, but regardless of return, over time price inflation is our biggest enemy to a secure financial future. The 1 million \$ you speak of in 1960 has the buying power of \$8,574,505 today. 1 million \$ today only has the buying power of \$117,000 in 1960. So, a millionaire today is not the same as 1960 and it will not be the same in 2078. So, a millionaire today is really only a thousandaire until he has over 8.6 million in assets.

The average household income today is \$61,858, that equals \$7,214.25 in 1960 dollars. The average income in 1960 was \$4,007, that equals \$34,358 or \$16.52 per hour, for 40 hours per week. So, if you have less income today than \$34,358, you have fallen behind. Too many of our jobs today pay way less than \$16.52 per hour and provide less than 40 hours per week. Many families in 1960 had only one wage earner not the two wage earners that is more common today.

So, for anyone with half a brain, getting out of debt, and saving every dollar possible during their working years should be job number one. It is not important that in retirement you may have a million dollars or more, but that you have something to get you through until death.
If you save nothing, you will have nothing, this is what we must teach our family and friends.

I just wish I would of learned this at age 20 not 63. I retired at 50 because of family reasons with a small military pension to get me to age 62 and social security benefits. Now I have credit card debt that will be paid off in Dec 2019, lucky it has now been transferred to zero interest accounts, allowing me to pay less per month. Starting in 2020 I will be able to invest \$1,300 per month and will have an \$8,000 emergency fund, a first for me.

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