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December 29, 2005


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The article makes some good points, although I think that the 10.7% assumption is a bit unrealistic... After all, people change their investment mix over time (or at least they should) such that the investments will probably grow less in later years (lower risk investments = lower returns). All the same, getting your kids to take a long term view is definitely a good thing.

Very good article. One point that's mentioned is that you've got to use a low-cost mutual fund. I found some research analyzing a 25 year old investing 10 percent of their $30,000 income each year until retirement into mutual funds. Comparing money put high-cost funds with that put into low-cost funds produced quite dramatic results. The good news is that the person investing in the high-cost funds ended up with around $1.7 million at retirement. Not too bad!

In my 9 years of publishing a financial based letter, I've come across this topic many times. The problem however, is that the way it's presented, it's simply not possible.

They all toss around the idea that it's easy to make 10% per year. I assure you, it's not only easy, its often impossible. For instance the year that just passed found the bulk of the hedge fund industry only made 3 to 7%. These are some bright fellas, yet they couldn't do 10%.

Likewise, it's easy to find a mutual fund that did say 20% this year. Just look at any of them that specialize in energy and they had a banner year. But, look back over their 5 year life and what sort of returns are there? Often it's sub 8%.

Do a screen on the Morningstar mutual fund search and you'll see that large cap value returned just 4% on average. Even the domestic small caps had a high of 10.79% and a low of -3.3%. The average was about 6%

I love the idea of compound interest, and I assure you that if you did teach your kids to invest at age 16, they could do very well for themselves by age 65. But, without actively managing the portfolio and getting it right a lot more than getting it wrong, you'll never see your elusive million dollars.

My contribution to this idea is this: take half of that money and put it in something secure that's giving you a decent return. With the recent interest rate hikes, you can snag 4.5% easily. Take theother half and use it to invest in such things as mutual funds and ETF's etc. The combination gives you some sagety and interest compounding, while giving the added benefit of possibly beating the market averages.

Bob --

They aren't saying that you'll earn 10% EVERY year, but that you'll AVERAGE 10% over the course of decades.

10-11% is the market's historical return. To say that just because it didn't earn 10% last year that the estimates are inaccurate is inaccurate itself. If you've published a financial newsletter for nine years, you should know this.



I certainly wasn't looking for an argument, that wasn't my intention. But I will ask an interesting question. If and yes I said if, the market returns this average of 10% a year historically, why then do foreigners buy approximately 1.7 billion dollars a day in treasuries paying less than 5%?

Don't they know what a lousy deal they are getting? Are the Central Goverments of the world shielded from the knowledge that the market returns 10%? We are going to see the 30 year bond return and already it's oversubscribed. Yet it will pay less than half of that 10% the market supposedly returns "over decades".

I'm sorry, didn't mean to shake any trees. Just observing that a lot has to go pretty right for the average person to get a ten percent return.

Bob --

Different people have different investment needs. Some need guaranteed returns, some need liquidity, some need growth, some need income and on and on. That's why people/governments buy different investments.

Really, I don't mean to seem rude, but this is pretty basic investment knowledge, isn't it?


isn't there some way that we can become a millionare faster or do you have some tips on some jobs i could when im really young like now, as in........10 or 11?
P.S. please e-mail me back it would really help me alot

Claire -- I don't have any job tips for you, but certainly commend you on your desire to find employment. When you do find a job, save as much as you can. At your age, any savings you put away now will be worth a great amount in 30 or 40 years.

Good luck!

I'm much more interested in the market's inflation-adjusted returns. From that you can get a clearer idea of exactly how much your investment will grow in real terms. Using the historical numbers from Yahoo Finance (, I took the S&P 500 close on Jan 3, 1950 (16.66) and Jan 3, 2006 (1268.80). That works out to an annual return of 8.04%. This calculator ( based on CPI data says that $1000 in 1950 had the same buying power as $8244.81 today for an inflation rate of 3.84% annually over the same period. That puts the S&P 500 4.2% ahead of inflation since 1950. I picked the dates because 1950 was as far back as the S&P historical data goes and Jan 3rd was the first trading day both years.

The biggest win in this scenario comes from three factors. First, however you slice it, in the long run the stock market has historically beaten inflation by a useful margin. Second, by putting the money into a Roth IRA at the very beginning of your working life you have paid income tax on it at what should be the lowest marginal rate you are ever likely to see. All of the gains when you withdraw it are tax-free. Third, you are giving compounding the maximum portion of your life over which to do its work for you.

Can a parent start saving for their child's retirement since birth or do they have to start at age 16? I have a 10 month old I would like to have financial secure for the future and am thinking about opening a 529 college savings plan for her, but considering college doesn't work out I want to see her finacially secure and not have to worry about retirement later. Also, I have an appointment with my bank's Financial Consultant what other questions should I be asking him. Thanks in advance for any help!

Yvonne --

Here are a couple posts on saving for college, check them out to see if they help:


Your child can have a [Roth] IRA from the time that he/she begins earning income. A court decision has already set a precedent that this is good for as young as seven-years-old, but that doesn't mean that six, five, or even two won't work. Obviously, there are child labor laws that come into account. In most places in the country, the minimum age a child can get work is 14 (unless it is in a family business, which gets you around that quite handily).

The best way to do it, anyhow, is a family business. There are plenty of articles on the web that discuss the benefits. Essentially, since the child is below 21 and 18, you can pay them without having any federal payroll deductions (FICA or its match) and without federal unemployment insurance; state laws are a different matter, and I mainly focus on knowing my own state's laws. In addition, the child gets his/her own standard deduction. With these coupled together, the child can make up to $5150 without paying any federal taxes whatsoever; and chances are most states will allow you to skate by without much, if any, taxes. That more than covers the maximum [Roth] IRA contributions. You could have the child throw the rest in a Coverdell ESA (which behaves like a Roth IRA, but is for education); the maximum contribution for 2006 is $2000.

Also, you could setup a custodial brokerage account and the earnings would all be tax-deferred because you would buy-and-hold, and then when they are sold they would be at the capital gains rate.

Ok I'm 16 myself and have very little knowledge about what Roth IRA's and such are even about or what they do. Apparently you put money in wait for a long while and even more money comes out. That's what I gather and I see that Dus10 noted that the Max. contribution for 06' is $2000. Does this mean that you can only put in $2000 for just the first 4 years and then you HAVE to stop adding to it or can you put in $2000 for every year as long as you hold the account? Any help is appreciated, Thanks.

And you will have started and finished all of your saving before turning age 21.

No! This is obviously a good way to start a retirement fund. But it's not enough. Your claim that this should allow you to retire at 67 with a million dollars is technically true, but highly misleading. Inflation over the past 47 years has averaged 4%. If this persists over the next 47 years, you'll end up with less than $150,000 in inflation-adjusted terms.

Brandon - while the inflation factor is certainly depressing, how cool is it to turn $8,000 into $150,000 (in real terms), all at the expense of some forfeited music and soda?

I just read this post, and I'm surprised how livid Bob (the earlier poster) was. I really don't think it will be that difficult to earn 8% to 10% over the next 40 years, at least in nominal terms. Put it in the Vanguard Total Stock Market Index and let it sit; don't try to move it around and chase performance.

It's definitely pretty cool. And as I said above, it's a good start to a longer-term savings program. But as written, this post could easily be interpreted to mean that it's all you have to do, ever, to retire in comfort. And that makes it potentially dangerous without the caveat regarding inflation.

Settle down, Brandon. :) This post doesn't even begin to say that "it's all you have to do, ever, to retire in comfort." It's just describing how to hit that magic $1 million mark. There are plenty of other posts on the site describing ways to figure out what you'll actually need to retire comfortably. I really don't think you have anything to worry about.

Question for Dale: One thing probably not addressed in your post is that I don't believe reinvesteed dividends are included in the S&P 500 index. If you recalculated it with reinvested dividends, I believe you'd be at or above 10%.

If $8000 is invested for your child when she is 10 years old will she be a millionair at age 60 instead of age 67 ???

Charlie --

It all depends on the gross rate of return you use (and whether it's impacted by taxes or not), the amount you initially invest, and the years you have to save.

They use the numbers they do above because they assume the child works for the money (which has to be done to put the money in an IRA). In addition, they start at age 16 while you start at age 10 (and not all of their money comes in at once -- it's over four years). Those six years make a BIG difference.

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