Two Demons Eating Up Your Investment Earnings
Note: This article is courtesy of Iris.xyz
By Mark Germain
Thirty years ago in a small conference room in Connecticut I was teaching a group of employees of the soon-to-be defunct American Cyanamid how to plan for their future when the business went away.
A surprising but extremely important lesson for all in attendance came from a 66-year-old factory worker who had never made more than $60,000. In 1949, however, he saved $500, put it into a mutual fund, and then invested $100 every month until that day in 1986.
Guess what he had to live on in retirement? If you guessed $2.3 million, you are correct. If in 1986 he invested that $2.3 million in 30-year government bonds, he would have had annual interest income in excess of $80,000, and be able to pass the $2.3 million in principal to his kids when he died.
Multiple lessons can be learned from this story. The first is, “It matters not how much you make, but how much you keep” (author unknown). If the factory worker had doubled his wages but did not save, he would not have been able to retire in 1986.
When you earn money, saving some of it helps assure you have sufficient funds in the future to meet your goals–no surprise there. But it is also important to make sure the money invested nets as much as possible within your risk guidelines (1).
Two demons eat up what you earn on your investments:
- Taxes
- Inflation
Inflation has been low since 2009, and most economists aren’t expecting it to go up much anytime soon. According to tradingeconomics.com, inflation rates over the last decade had a high in 2008, exceeding 5%. The same source believes last year’s inflation rate was only 2%, and that it will slowly grow to 2.8% by 2020.
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