Dear Dr. Don,
This question involves how best to make for a better life for my family. How can I make a one-time investment of $5,000 grow into $1 million or more over 60 years? One of my broader goals is to encourage my young grandchildren to save.
-- Dan Deposits
What a wonderful way of leaving a valuable legacy behind for your family. I applaud your thoughtfulness and your enterprise. And a little love helps, too, while we're at it!
Simply put, successful investing over time is something akin to child's play. Investment earnings reinvested properly allow for compounding of interest. Turning a one-time investment of $5,000 into $1 million after 60 years isn't nearly so easy. To achieve this goal, the funds must earn an annual return of about 9.233% after taxes.
Check out the calculator
I looked at this using a financial calculator. You can either use a spreadsheet or, even better, use Bankrate's millionaire calculator. It allows you to play around with different scenarios.
One challenge when working with the calculator involves adding the inflation rate. For example, taking $1 million with a 3% inflation rate over 60 years yields purchasing power of just $169,812 in today's dollars. $1 million in purchasing power 60 years from now, even if inflation averages 3%, requires an after-tax return of about 12.51%. That seems like trying to hit the lottery.
No matter how it turns out, the fact that you want to teach your grandchildren about the power of saving, including compounding interest, is a great thing. You can also teach them about inflation and taxes at some point when they are old enough to understand. That might have to wait a few years. In the meantime, you are giving them a valuable head start!
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