Lifestyle > Train of Thought
The power of Compound Interest, the stock market, and your 401K plan
Trauma-san:
How many of you guys are getting into Investing? I'm amazed once I looked into it the last few years of how this shit works.
I found a story of this guy and his estate plan.
He a few years ago had a grandson. He set up his finances so that he could give his baby grandson a gift of 10,000 dollars. His grandson kept the money for 31 days (legally). Of course his parents were all in on this and everything, etc.
He then had his grandson put the money into a variable annunity trust. The money basically is sitting in a bank. the terms of the trust are that his grandson can't touch the money until he turns 65, so the money will sit in this trust for 65 years. All the dividends of the variable annuity are reinvested into the account, and the tax is defferred.
The equity funds he invested the money in have grown at a rate of 11 percent a year, historically. If they continue at that rate, his 10,000 dollars will have grown to 10 million dollars by the time his grandson reaches 65. Now keep in mind though that inflation will have grown by then as well, so 10 million dollars when the kid retires won't be the same as today, but still it will be quite a large sum of money.
The guy has the trust set up so that when his grandson reaches 65, he will be given yearly payments equal to 7% of the total of the trust fund. So what's that, about 700,000 dollars each year. Again though with inflation it won't be that kind of mad money, but it'll still be a very large sum of money each year. With the 7% disbursion the money will still be growing at an average of 11%, so the money will actually still be increasing, while he all the while is receiving payments from it.
Finally, when his grandson dies, the money is set up to be donated to tax exempt charities. If his grandson lives to be 85, he will have collected more than 700 grand a year for 20 years, and there will be 20 million dollars donated to charity upon his death.
The way he did it was he combined the youth of his grandson with the financial capital of his own life of work. So he spent 10,000 dollars, and used 65 years of his grandson's life to accomplish the financial goal. He doesn't have 65 years to wait around and donate 20 millioin dollars to charity, but his grandson does. Likewise, his grandson doesn't have 10 grand to get this rolling, but his grandfather does.
THIS is how people get extremely rich, not by cheating people out of money like the victims among us sometimes claim.
Trauma-san:
Oh, with inflation at 3% for 65 years, that would make that 700,000 dollar payment the kid recieves at 65 worth about 135,000 dollars in 'today's dollars'. Still a very comfortable retirement.
Ant:
--- Quote from: Trauma on December 23, 2005, 08:24:17 AM ---Oh, with inflation at 3% for 65 years, that would make that 700,000 dollar payment the kid recieves at 65 worth about 135,000 dollars in 'today's dollars'. Still a very comfortable retirement.
--- End quote ---
Oh yeah... retiring at age 65 with $135,000 assuming you live another 20 years leaves you with an extraodinarily comfortable $6,750 to spend a year plus Social Security money which the current administration wishes no longer existed.
The unfortunate thing is most people won't even retire with this much. I know plenty of people approaching retirement age that are either in debt or have nothing saved. They end up having to work and work until they die basically, or retire and live off social security. Most of the people I work with don't save money in their 401k, or if they do, end up borrowing against it anyways. Of course these are issues that don't really get a lot of attention. People keep them hidden - no one wants to talk about how broke they are, or how much debt they are in... so we just keep borrowing and borrowing and the problem is ignored.
Trauma-san:
Hello;
When you learn to fucking read, come back and reply. 700,000 each YEAR. PERMANENT.
The problem isn't the government, the problem is people know nothing about finance. You just proved it by failing to follow the simple example of interest and annuity I posted above. Educate yourself and maybe you won't have to worry about George Bush holding your hand through it.
Don Rizzle:
good luck finding anything to garentee 11% a year, what are US interest rates? isn't it around 2%? i know you could invest in stocks n shit but they can go down too
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