|
Can I save just a little and
retire like royalty?
Dear Dollar Diva,
Reading books on managing personal finance and becoming debt-free
has really helped us improve our financial situation. We are now
ready to save for retirement, and one of the books suggests that
a 25-year-old person investing about $90 a month at 15 percent interest
will have $3 million in 40 years.
So how do we invest $90 monthly at 15 percent interest?
Is such a scenario really possible? What would be the most risk-free
way to make such an investment? My spouse and I make $60,000 combined
annually, we have only a checking account and a savings account,
and we know absolutely nothing about investing.
Thanks in advance for your advice.
The Diva congratulates you on your early start in
the investment game.
| Diva reminder |
|
If you invest in a Roth, none of your distributions
will be taxed when you retire.
|
The Good News
Keep on doing what you're doing -- learning and saving
-- and the Diva expects you to be in excellent financial shape when
you retire.
The Bad News
Don't expect a 15 percent after-tax return on any
investment year after year. Warren Buffet, Peter Lynch and very
few other investment gods can aspire to such lofty returns -- mere
mortals cannot.
| Reality Check |
| The market has returned an average of 10 percent
to 12 percent annually over the past 40 years. The Diva thinks
it's reasonable to expect a similar return over the next 40
years, but read on. |
| You are investing long-term and the market fluctuates.
The past 15 years have been exceptionally good for investors
with the past five years providing annual returns more than
twice the 40-year average. The Diva thinks it's realistic to
expect some low-return years to follow these exceptionally high-return
years. |
| Keep to your program of systematic investing. |
Reality
A 10 percent to 11 percent average annual return is
a realistic expectation over the next 40 years, especially if you
take advantage of the tax benefits offered by a Roth IRA, 401(k)
or other retirement plan.
Let's say you invest $200 a month in a Roth. Your
total investment will be $96,000 over the 40-year period. How much
in interest, dividends and capital gains (earnings) will you shelter
from taxes?
Changing the amount you invest will, of course, change
the amount you earn. But any way you slice it, long-term compounding
is a beautiful thing.
| How much you'll have in 40 years if
your investments earn... |
Now you know why the Diva touts the Roth IRA!
What should you invest in?
When you're clueless or when you don't have the time
or inclination to do the work necessary to manage an investment
portfolio, no-load index funds are the way to go. Vanguard is the
800-pound gorilla, but any reputable investment company that offers
returns close to the S&P500 index will do. The Diva recommends
starting with:
Balanced index fund (Moderate risk). Made
up of stocks and bonds. The goal is for income and capital appreciation.
Growth index fund (Higher risk). Made up of
domestic stocks. The goal is for long-term growth of capital.
|
-- Posted: Nov. 2, 1999
DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
