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Saving for pension? - amazing power of compound interest!
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cardguy Offline
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Saving for pension? - amazing power of compound interest!
I have written about Compound Interest before - something Albert Einstein called the Eighth Wonder of the World.

http://www.rooshvforum.com/thread-26172-...#pid520736

http://www.rooshvforum.com/thread-26172-...#pid520843

But this article still startles me.

It turns out that saving for your pension for ten years (between the ages 21-30) will produce a bigger pension pot than saving for 40 years later in life (ages 31-70).

http://www.telegraph.co.uk/finance/perso...or-40.html

The journalist thinks that is the most amazing fact in his article. But I think there is an even better one buried in there.

It turns out that if you take a new born baby and put aside pension contributions for the first 2 years (ages 0-2). The baby will end up with a larger pension than if the person spent the 40 years from 31-70 putting aside pension contributions each year.

This is a real head fuck for me! Does this mean we could solve the pensions crisis by just putting aside money when kids are born?
(This post was last modified: 04-07-2014 11:35 AM by cardguy.)
04-07-2014 11:34 AM
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Chemistry Offline
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RE: Saving for pension? - amazing power of compound interest!
Yes. Because the "big money" of compound interest comes all toward the very end.

Exponential functions (i.e. compound interest) work so that your money will double in X years (Higher interest rate = smaller X)

Over the first 18 years of a kid's life, that's at least one extra "doubling" period. And that early doubling leaves room for an extra doubling later in the kid's life (a "doubling" that a late-starter won't get).

Great idea though, saving for the kid's own retirement at the time of his/her birth. Regular financial advice is to start saving early (i.e. early 20s when you first start making money). Why not be 18 years ahead of that particular train Tongue
04-07-2014 12:37 PM
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polar Offline
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RE: Saving for pension? - amazing power of compound interest!
Rule of 72, divide 72 by your annual % return to get how many years it will take to double.

Funding 18 years early sounds like a trust fund baby.

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04-07-2014 03:09 PM
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cardguy Offline
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RE: Saving for pension? - amazing power of compound interest!
Yeah - but the figures from the article are remarkable.

Just 5K at birth - will result in a bigger pension than people spend 40 years trying to build up.

Talk about a free lunch...
04-07-2014 03:22 PM
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lavidaloca Offline
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RE: Saving for pension? - amazing power of compound interest!
The general consensus I've read is that you can expect 1000% gains every 25 years you are invested in equities. I doubt this takes into affect taxes but there are certainly a number of tax deferral methods that are available. (most to business owners) Thats why the people who are stupid rich are typically very old.

1 million at 20 = 100 million at 70. = 1 billion at 95

More or less. Buffet was able to get such a high net worth because of his extremely high returns. If you were starting out with $0 today and invested 20k a month in 60 years you'd have 73.5 billion if you got 20% annual returns (which is approaching Buffet returns). Now 20k a month is probably on the ridiculous side for most people but even if we drop that number to 3k a month you still end up with 11 billion in 60 years.

Hence, when you break it down Buffett wouldn't have had to invest as much money as people would typically think in order to obtain his net worth. The vast majority would be money made on money.

Food for thought? Every extra percent you get in returns pays out substantially later in life! People who build a company from start to finish that go public and are a big success are typically the richest people in the world. They are able to get a very high rate of return far higher than that of index funds.

Personally, I'm beginning to lean towards having 100% of equities. Most people don't have the stomach for it but hopefully I'll be the one laughing a 1/4 century from now.
04-07-2014 03:39 PM
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cardguy Offline
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RE: Saving for pension? - amazing power of compound interest!
Warren Buffett is a great example of this. Check out these stats:

Quote:Of Warren Buffett’s current $60 billion net worth, $59.3 billion came after his 50th birthday, and $57 billion came after his 60th. Compound interest works its wonders only in very long periods of time.
04-07-2014 03:46 PM
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polar Offline
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RE: Saving for pension? - amazing power of compound interest!
It's important to maximize inflation-adjusted returns.

I'd be curious to see Buffett's wealth over time adjusted for inflation.

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04-07-2014 04:25 PM
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lavidaloca Offline
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RE: Saving for pension? - amazing power of compound interest!
It's crazy to think that one could legitimately reach 11 figure net worth (10 billion +) without ever making even 7 figures in a year if they were able to generate very high returns like Buffett. Heck a guy could reach 10 or 11 figures never making 6 figures in a year if he were to invest 3k every month at 20% return for 60 years. (Granted in both these scenarios they would owe substantial taxes)

I think that the next generation of rich will be multiples richer than the current generation. It wouldn't surprise me to see someone like Zuckerberg reaches a trillion dollar net worth.

I think the issue becomes a then vs. now argument. Who wants to wait 25 years to buy a car the really want, a house etc.

A 25 year old who invests 3000 a month for 40 years ends up with 16 million with a more normal 10% rate of return. Unless inflation gets ridiculous that should be more than enough for a great retirement.

Hopefully we see some young people 25-50 years from now on the rooshv forum thanking you for point this out to them. Of my peer group from undergrad 90% of which studied business 90% of them show no interest or investment in equities. It's the typical buy a house, car etc. While they may get the toys quickly, it's a rather shortlived advantage.
04-07-2014 04:30 PM
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RE: Saving for pension? - amazing power of compound interest!
Saving is very important. But whoever is managing your retirement isn't going to do it for free. Americans with 401k's should be careful because along with compounded interest are compounding fees (expense ratios) that are applied to the entire balance of your retirement savings, not just what you've earned in interest. You could end up paying 1/3, 1/4, or even 1/2 of your entire 401k in fees.

Quite a significant issue that many Americans are not aware of.

Take a look at this:

How retirement fees can cost you

Edit: Made several modifications to post
(This post was last modified: 04-07-2014 05:01 PM by Laurifer.)
04-07-2014 04:46 PM
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cardguy Offline
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RE: Saving for pension? - amazing power of compound interest!
Warren Buffett was always focused on the long term.

Even when he was young and a millionaire - he hated buying his wife nice things.

To his wife the dress might only be a hundred bucks.

But in his head - he knew the money he spent on that dress would compound in the future to be tens of thousands of dollars.
04-07-2014 04:48 PM
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monster Offline
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RE: Saving for pension? - amazing power of compound interest!
Compound interest isn't nearly as great as it first seems once you realize that inflation also compounds, and that inflation is always a helluva higher than the "published" numbers by the BLS. Like right now they say inflation is at 1-2%. That's cause they exclude everything that really matters....food, insurance, energy...basically the things that people spend 50% or more on.

Then of course there's taxes...

Suddenly compound interest isnt quite the eight wonder of the world.
(This post was last modified: 04-07-2014 05:12 PM by monster.)
04-07-2014 05:09 PM
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lavidaloca Offline
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RE: Saving for pension? - amazing power of compound interest!
Generally speaking people who have very high net worths are using tax deferral strategies. So sure they may pay large amounts of taxes when they withdraw 30 years from now but they also were using a ton of money to invest that they wouldn't otherwise have access to.

Inflation may go up by 2% a year but your income should also go up by a factor. Taxes suck but it's very different for someone who has to invest after paying 46% income taxes on the money than someone who only pays a preferential rate of 15.5% then invests. The second person will owe a lot of taxes at some point but they also were able to invest money that the first person wouldn't have access to.

Of course the value of money will deflate. A million dollars 40 years from now would probably not allow for a reasonable retirement in America. But we have higher salaries now than we did 40 years ago that should make up for this. Beyond that the board is largely geared towards people who have an affinity for travel and long term living abroad. Perhaps a specific country will undergo massive inflation and no longer be an attractive option 20 years from now (Brazil is a place that comes to mind) but there will certainly be other places that have suffered far less inflation.

Take your wealth where it goes further. The problem is most people buy a McMansion and then never want to leave it even when it is completely financially imprudent. I read an article today about a couple with 4 million in net worth who were "struggling". The clear reason was that 2 million of it was tied up in their house, add to that low yielding investments and they were hardly living a great lifestyle. This is why I don't understand why people shell out so much on housing. If they sold the house and moved into a place more modest they could have a nice yearly income providing for a pretty good retirement income.
(This post was last modified: 04-07-2014 06:16 PM by lavidaloca.)
04-07-2014 06:16 PM
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tarquin Offline
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RE: Saving for pension? - amazing power of compound interest!
Tax deferral can be great, but if you qualify for a Roth IRA you are much better off paying the taxes now and having all of your investment gains be tax free.
04-07-2014 07:21 PM
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Feisbook Control Offline
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RE: Saving for pension? - amazing power of compound interest!
I wouldn't have my money anywhere near a Roth IRA. Why? Because one of the main incentives for putting money in such a thing is that you don't get taxed on the way out. Yeah, right, sucker. Reckon the government isn't going to double dip? Think again. You can trust the government about as far as you can spit a rat.

A year or two ago, my father was squealing like a pig because the Australian government was going to double dip in exactly this fashion. Christ, I could have seen that a mile off. In fact, he saw that a mile off. A decade ago, he had a conversation (that he regularly cites) with my uncle. My uncle said that the government wouldn't take his money because he wasn't rich. My father asked him to define "rich".

Given that the average Westerner has approximately three fifths of five eighths of bugger all saved for retirement, and many governments have unfunded liabilities in the twelve or thirteen digits (estimates for the U.S.A. range from 70 trillion dollars to 200 trillion dollars -- that's fourteen to fifteen digits!!!), anyone with a pocketful of loose change is now "rich". Of course, the really rich people have their money offshore. In historical fashion, it's always the middle class who take it in the neck, and Roth IRAs and all the rest of it are just a long con on the middle class. Bail ins a la Cyprus, etc. are also going to be the new normal.

My advice is to get your money offshore; stock up on guns, tinned food and gold; or some other such scheme where they'll at least have to give you a reach around before fucking you in the arse. Even burying all of your money in the backyard is probably going to be better than putting it anywhere within reach of the government. At least if you bury it in your backyard, the government won't be able to take it from you. Of course, it may effectively be worthless, though you could use it for kindling or toilet paper, so that's something, at least.
(This post was last modified: 04-07-2014 07:42 PM by Feisbook Control.)
04-07-2014 07:38 PM
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tarquin Offline
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RE: Saving for pension? - amazing power of compound interest!
Such double-dipping would be a "taking" by the government without compensation and prohibited by the Constitution. Sure, you can say that Constitutional rights are eroding and may not be present when I take money out in 50 years, but I would rather go for the bigger payout with a Roth IRA than kick myself later for using a Traditional IRA.
04-07-2014 07:56 PM
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Switch Offline
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RE: Saving for pension? - amazing power of compound interest!
Sheesh, so apparently the strategy to get rich is to invest 1k every month into the S & P 501 starting at age 20. Assuming 10% / per you'd have 6.4 million at age 60, and 47 million at age 80, and 130 mill at 90. If you up your monthly contributions to 1.5k, at age 60 you'd have 9.6 mill, and then of course by age 90 you'd be at 195 million.

If you go 2k per month, at age 60--12.7 mill, 90--260 million dollars.
If you go 3k per month, 60--19 mil, 90--390 million dollars

Use this tool: https://www.investor.gov/tools/calculato...0NXOvldWSo

Why are there not more ultra-high net worth individuals? If you save just a little bit, by 65 it's practically impossible to not be a millionaire...

EDIT- if you put away $100 per month starting at age 20, your account would be worth over a million by age 65, at 10%

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(This post was last modified: 04-07-2014 08:12 PM by Switch.)
04-07-2014 08:07 PM
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lavidaloca Offline
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RE: Saving for pension? - amazing power of compound interest!
(04-07-2014 08:07 PM)Switch Wrote:  Sheesh, so apparently the strategy to get rich is to invest 1k every month into the S & P 501 starting at age 20. Assuming 10% / per you'd have 6.4 million at age 60, and 47 million at age 80, and 130 mill at 90. If you up your monthly contributions to 1.5k, at age 60 you'd have 9.6 mill, and then of course by age 90 you'd be at 195 million.

If you go 2k per month, at age 60--12.7 mill, 90--260 million dollars.
If you go 3k per month, 60--19 mil, 90--390 million dollars

Use this tool: https://www.investor.gov/tools/calculato...0NXOvldWSo

Why are there not more ultra-high net worth individuals? If you save just a little bit, by 65 it's practically impossible to not be a millionaire...

EDIT- if you put away $100 per month starting at age 20, your account would be worth over a million by age 65, at 10%

Because incomes weren't what they are today 40 years ago. A quick browse of the internet and I found this "According to a 1987 Harvard study published in the Economics of Education Review, the average starting salary of a Michigan teacher was $7581 in 1970 - See more at: http://inequality.org/invisible-recessio...DL74e.dpuf

A thousand dollars a month would be more than most peoples entire incomes. While a 3 or 4 million dollar retirement may seem huge to a 20 year old right now. It probably won't be all that huge when you are 65. Based on fooling around with inflationary calculators I'd guess 4 million dollars would be worth about a 1/4 of what it is today 45 years from now.

You have to remember how many people really even had enough income to invest 1k+ a month back 40 years ago. In todays world we'd probably say 250k a year is a "great" retirement. However 40 years from now that number will probably need to be multiplied by a factor of 4 or 5 to have a "great" retirement. If you want to withdraw 250k a year generally speaking from what I've read it seems you should have about 6 million invested (4%). In order to have the same retirement 45 years from now that would likely require 25 million invested.

The thing we can take advantage is of moving to other countries where for the fraction of the cost we can have a great retirement income. Being 40 or so years away from retirement myself, I certainly wouldn't want to retire with 1 million in the mid 2050s. That will like be similar to retiring with 250k today, something I certainly wouldn't do.

People should be doing everything they can to invest atleast $1,000 a month even if they don't plan on retiring because later down the road they'll be able to buy a lot more with it than they could in the present.
04-07-2014 08:38 PM
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Feisbook Control Offline
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RE: Saving for pension? - amazing power of compound interest!
(04-07-2014 07:56 PM)tarquin Wrote:  Such double-dipping would be a "taking" by the government without compensation and prohibited by the Constitution. Sure, you can say that Constitutional rights are eroding and may not be present when I take money out in 50 years, but I would rather go for the bigger payout with a Roth IRA than kick myself later for using a Traditional IRA.

For real? Did you miss the entire point of my post? I'm not advocating a traditional IRA over a Roth IRA.

Dude, what the hell is the Constitution? People act like it's a law of physics or something. It's a piece of paper. It might contain a lot of very good ideas, but it's still a piece of paper that can, and is, ignored. Between governments and corporations on the one hand, or plenty of women/liberals/minorities claiming it's irrelevant because it was written by dead, slave owning, white males, what the hell is the Constitution?

"But...but...but you can't do that because of the Constitution!"

They have and they will. Wake up and smell the coffee. Fight or flight. Standing still and waving a piece of paper at a wolf makes you somebody else's meal. You have to get past this quasi-libertarian idea that everyone is a rational, moral agent. Most people don't give a fuck. If you have something they don't, then that's moral justification for taking it from you, regardless of how you acquired it, because their time horizon is about five minutes into the future and five minutes into the past. Therefore, all they know is that you have it and they want/need it. That's as complicated as it gets. We live in an age of rule by man, not rule by law. Maybe some day, rule of law will return (if it has ever really existed). In the meantime, don't become these guys:



04-07-2014 08:39 PM
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Switch Offline
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RE: Saving for pension? - amazing power of compound interest!
I didn't take into account inflation, correct. But 40 years ago , 100$/month was very doable for a lot of people. I guess what I'm saying is there really isn't an excuse for not having the equivalent of 1 million 2014 dollars at retirement.

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04-07-2014 09:17 PM
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RE: Saving for pension? - amazing power of compound interest!
(04-07-2014 09:17 PM)Switch Wrote:  I didn't take into account inflation, correct. But 40 years ago , 100$/month was very doable for a lot of people. I guess what I'm saying is there really isn't an excuse for not having the equivalent of 1 million 2014 dollars at retirement.

That is, of course, barring any sort of catastrophic Great Depression-like meltdown during your working life or during retirement.

EDIT: apparently I'm a beta orbiter now. wooot

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(This post was last modified: 04-07-2014 09:30 PM by Switch.)
04-07-2014 09:28 PM
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tarquin Offline
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RE: Saving for pension? - amazing power of compound interest!
As I stated, you can talk about Constitutional erosion, but if it gets to that point, the money I put into my IRA doesn't matter either way. What are the odds of a true government/societal collapse in America in my lifetime? I mean real Armageddon. 1:10,000? More? Less? At the very worst we would be Argentina. I would lose my retirement and would also not have to fight hordes of axe-wielding barbarians. If you want to spend time focusing on the negatives while ignoring any possible upsides or positives... feel free.

I can't find the article, but there was a man who sold his car and his possessions at the height of the Chilean crisis under Allende. He plowed all that money into Chilean stocks. He knew that there were two possible outcomes: 1. Everybody is poor and I die in chaos, or 2. Somehow this works out. If we put this on a decision tree, or a game theory grid, he made the right decision.

I intend to make that decision. If I bet "wrong," and society collapses into chaos and I only have meager means of support... so be it.
04-07-2014 09:35 PM
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RE: Saving for pension? - amazing power of compound interest!
(04-07-2014 07:21 PM)tarquin Wrote:  if you qualify for a Roth IRA...


For those guys who earn an income higher than the cutoff for being able to contribute to a Roth IRA, there is a backdoor method that allows them to legally contribute to a Roth IRA and take advantage of tax-free gains.


It basically involves contributing already earned taxed income into a traditional IRA. The $$$ in that traditional IRA is then rolled over/converted into a Roth IRA, where the gains made will not be taxed.


This is currently relevant as the deadline to contribute to a 2013 Roth IRA is until April 15th this year; so you still have about a week from the date of this posting to make a contribution.


Here is a LINK to a wiki article describing the backdoor Roth process in more detail.
04-07-2014 10:21 PM
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RE: Saving for pension? - amazing power of compound interest!
This investment/financial writer has a great fuck you (retirement) plan

Quote:One of the first things I did when I was a child and figured out the time value of money, and how powerful it could be, was to create a plan that would ensure that no matter what I did or how successful I was, that I would retire rich. For years, I called this my “stupidity” insurance or my “reserve” fund because it was designed as a sort of self-written insurance policy that no matter how royally I screwed up or how bad things became in life, there was a huge “compounding machine” working in the background for me.

Quote:The program worked like this: If, starting at 14 years old (which was 4 years in the future at the start of the program), I could save $500 per month by working after school or doing side projects for people, and I could park the money at 5% until I was 30 years old, I would have roughly $141,945 in this insurance fund. I’d kick in the extra $55 to make it an even number, so let’s call it $142,000.
This $500 was my “insurance premium”, so I didn’t think of it as saving or investing because that is what my brokerage accounts were for – for all intents and purposes, this money didn’t exist to me. I treated it like an expense, or a car payment. I did everything possible to get it into tax-advantaged accounts such as a Roth IRA or SEP-IRA because I wanted the money to be able to grow tax-free when it reached what I called “the vesting date”, which was my 30th birthday. This was the date at which I would stop contributing money to the fund and split everything that had built up since I was a kid into different asset classes (stocks, bonds, mutual funds, real estate, options, etc.) and invest it in such a way that it could be passively ignored for years. In many cases, the law requires you to take distributions from your retirement accounts by the time you are 70, so that would be 40 years of compounding.

If this passive money earned 10% (I have a history of earning much more, and I planned on utilizing things such as self-directed IRA accounts that would allow me to actually buy an apartment building or hotel, for example, as the money grew but I’m keeping it there for the sake of conservatism; most people should bet on 7% to 8%), by the time I reached 70 years old, the “insurance fund” would have $6,426,814 in it. There would be virtually no taxes owed on this money because of the types of accounts in which I had placed the funds.
Most research shows that even in a Great Depression scenario, withdrawals of no more than 4% per year mean that you’ll never run out of money. At a 4% rate, I could take $257,072.56 in dividends out of the account each Christmas for the rest of my life. That’s $21,422.71 per month after taxes that I could live upon, simply because of money I saved from the time I was 15 to 30 years old without ever contributing another penny.

To put it another way: I would never have to save another penny beyond my 30th birthday, and anything else I built up such as businesses I started, retirement plans, brokerage accounts, home ownership, etc., would all be extra (and, if I did my job correctly, would dwarf the insurance fund in value at retirement). But if I utterly, totally, and completely screwed up life and blew everything I ever made and became a total profligate, I’d still retire with a monthly income of $21,422.71 after taxes plus any social security for which I qualified. That’s why I called this my “stupidity” insurance.

Quote:The main benefit of the program is intellectual freedom to pursue what you want to do without fear. It could be argued that one of the reasons I launched companies after graduation, rather than take a job at Merrill Lynch or Goldman Sachs, was because I knew if I failed, I’d still end up rich

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(This post was last modified: 04-07-2014 11:07 PM by bacon.)
04-07-2014 10:44 PM
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RE: Saving for pension? - amazing power of compound interest!
I find it quite fanciful that people are talking about returns of 20%.
04-08-2014 12:18 AM
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RE: Saving for pension? - amazing power of compound interest!
Here is the annual return and compounded value of $100 invested in Stocks, Cash, and Bonds from 1928 to 2013 :

http://pages.stern.nyu.edu/~adamodar/New...retSP.html

(Note that this is starting 2 years before the Great Depression when Stocks got smashed)

$100 invested in Stocks would now be worth $255,553

$100 invested in Cash (3 month t-bill) would now be worth $1,972

$100 invested in Bonds would now be worth $6,295
(This post was last modified: 04-08-2014 12:32 AM by Steve9.)
04-08-2014 12:31 AM
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