# Differing investing results when done during career or as retiree

joyfulguyMay 21, 2009

On the day that you became employed, you had brains and hands at work ... and no money.

One the day that you retire, you have brains and money at work ... and no hands.

Suppose you have \$100.00 and invest it at 10%.

At the end of the year it'll provide you with \$10.00 ... and if you're retired and need the money, you'll put the money in your pocket and use it to live on.

At the end of year two, same thing happens again.

After ten years, the total amount that your \$100.00 original investment has earned is \$100.00 - it has doubled.

However, while you are operating your life in your career, prudently living on your current income, let's say that you invest an equal \$100.00 and have it earn 10%, as well.

The difference is that you leave the \$10.00 interest/growth earned after the first year with the original amount, to earn a similar 10%, ongoing. After year 2, you do the same, and continue that plan throughout the ten year period.

When you leave the annual growth to grow along with the originally invested amount, it grows to well over the \$200.00 referred to earlier, when the growth was being withdrawn as it was earned: it will have grown to \$259.37.

If it had earned 5%, the value after 10 years would have been \$162.89.

After 20 years at 5%, \$265.33 ... at 10%, \$672.75.

After 30 years at 5%, \$432.19 ... at 10%, \$1,744.94.

After 40 years at 5%, \$704.00 ... at 10%, \$4,525.93.

After 50 years at 5%, \$1,146.74 ... at 10%, \$11,739.09.

To figure the value of \$1.00, invested at 5% for 40 years on your regular calculator, enter "1 x 1.05" ... then press the "=" button 40 times.

So ... starting to invest during one's earning years and leaving the accumulated asset to continue to grow has some real advantages!

But ... don't forget ... you aren't getting to keep all of the apparent growth.

There's an agency that comes to you every year, with a question and a statement ...

... the question is, "How much did you earn this year?"

... and the statement is, "We want part of it!".

Yes ... the Income Tax people are partners in our personal business! They want a chunk of our income, each year.

Also, the original \$100.00 would have bought much more in the market at the beginning of the project than would \$100.00 at the end of 10 years ... or 20 years ... or 40 years (when we might have retired) ... or 50 years (when we'd been living on retirement income for a while ... but I hope that we have some extra assets available, in case we live for more than 10 years after retirement).

Inflation chews away part of the value of our assets each year.

So it is more advantageous to invest during one's career, when one plans to let the growth that the invested assets produce continue to produce more assets.

There's another advantage ... if you have an emergency, you have some assets on hand that you can draw on in order to deal with the issue without a great deal of fingernail-chewing. I advise making a real effort to replace the funds that were drawn to meet that emergency, later.

When you want to buy a high-profile (or new) car, and need to borrow money, if you use the car as collateral to undergird the loan, the interest rate will be fairly high ... if you don't pay, repossessing and reselling your vehicle is a pain in the patoot for the lender.

If you use stock or mutual fund certificates as collateral ... and don't fulfill your obligations ... all they need do to liquidate is call their broker and deliver the stock certificates: miniscule hassle.

Much less potential hassle ... so substantially lower rate of interest charged.

(I also say that most retired people should carry a substantial portion of their assets in equities ... but that's a different story, that I've developed elsewhere in these forums, if you look ... or email me and I'll send the message).

Good wishes for increasingly shrewd management of your income ... and assets.

And not just teaching your kids, but helping them in their self-chosen project of learning the same game (which you, as the excellent salesperson that you are, have convinced them to buy into).

ole joyful

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jkom51

Hi, OJ! Always great to read your postings. Hope all is well with you during these tumultuous times.

While at the dentist's office today, I picked up the April 2009 issue of Money magazine (part of the CNN/Fortune corporate entity) and there was an excellent article in it entitled:
" "The 7 new rules of financial security" - In a world turned upside down, you must re-examine some basic assumptions. A good place to start: understanding the true nature of risk."

It is seldom that articles really discuss how to evaluate your tolerance for risk, yet that's an essential beginning step for anyone with an investment or retirement account. I thought this was a very good basic article. I found it on the website and it is linked below for those who wish to read it.

Unfortunately there was another very good hard-copy article that they did not put on the web, titled "Build with Bonds". It was a clearly illustrated explanation of what bonds are (a loan, basically) and the differing types which lead to such different dividend and interest returns. I strongly urge anyone who is a beginner investor to try to get a copy of this article, as it's a great basic informational piece.

Boy, I just wish all these articles and web stuff had been available when I was in my twenties - I think we would have made some different choices, LOL. We did okay, but 90% of that was sheer dumb luck.

Here is a link that might be useful: Money magazine: 7 new financial rules

May 21, 2009 at 5:36PM
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joyfulguy

In the earlier message, I referred to the way to calculate what growth \$1.00 invested would produce after, say 40 years, etc. at 5%: enter "1.05 x 1" into your regular calculator, then press "=" 40 times.

If you'd like to know what the result would be should you choose to invest \$1.00 annually, that's simple - press "M+" after each calculation, i.e. "1.05 x 1 =, M+, = M+, = M+ ...", etc. for the number of years that interests you.

A caution, however.

The apparent rate isn't what you can keep: the Income Tax people want part of each year's income, so you'de better deduct your tax rate from what it looks as though you earned.

Also, if you invest where the number of dollars are guaranteed not to shrink ... they won't grow, either ... so you need to deduct the rate of inflation from the amount of your annual earnings on non-growth-of-principal assets, as well.

If your apparent rate is 8% and your income tax rate of that kind of income is 25%, that means that your after-tax earning on this matter is 6.0.

If the current rate of inflation is 2%, that takes your apparent rate of return from the after-tax level of 6.0% down to 4.0%.

That's the real rate of gain that you can keep, after the erosion of annual income by income tax, and of the value of the underlying asset by the rate of inflation.

That's called your real rate of return. The kind that doesn't slip like sand through your fingers.

That's the rate that you should use when calculating what your anticipated results of investing would likely be.

HTH.

ole joyful

June 28, 2009 at 11:53PM
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stinky-gardener

Joyful, I enjoy your posts too, though I must confess, my eyes are pretty well-glazed over after reading the ones above, lol!

My biggest "investment" is my house. You've heard some of my story already. I bought in 2006 when the market was high. Three years later,I couldn't sell it for what I paid for it. Values in my neighborhood have dropped about 15% since '06.

I am making improvements & planning other upgrades which hopefully will increase my value over time. Of course, hopefully the market will bounce back, but I don't think it will ever be what it was. Prices here were very inflated. I moved here from a less expensive state & really had sticker shock when I started looking at houses!

Little did I know at the time that the real estate bubble was not only about to burst, but it would burst & sink into oblivion!! Oh how I wish I'd waited to buy, but my crystal ball was just really dusty at the time!

I put 50% down & have a 15 yr. loan at a 5.3625% interest rate. I hope to pay it off a bit sooner...maybe in 12 or 13 yrs.

Given these facts, Joyful Guy, do you have any further advice?

June 30, 2009 at 8:46AM
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dreamgarden

"Boy, I just wish all these articles and web stuff had been available when I was in my twenties - I think we would have made some different choices, LOL. We did okay, but 90% of that was sheer dumb luck."

If you still managed to make money (in spite of not being entirely sure of what you were doing), than it appears that sheer dumb luck was better than no luck at all......

August 11, 2009 at 1:06PM
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jkom51

"Luck" is very often another word for "opportunity". Sometimes you are able to take advantage of it, and sometimes you aren't.

It wasn't hard to make money - we're in our late 50's, double-income no kids Boomers, and own a paid-for home, two cars and little debt. But we've made very specific choices in life, some of which paid off (DH's defined benefit pension and retiree health benefits) and some of which didn't. Our overhead is still high - I cringed the last time I totaled up what we spend monthly on various insurance policies - but as I've often said, I was taught to view insurance as risk mitigation, so it's a necessity in our overall estate planning.

We've done a lot better on our investments since I really started paying attention to investing and made an effort to learn about it. But when I look back, we left the portfolio unattended until almost too late in life.

Fortunately, I picked up the interest in learning about investing before the dot-com bust. So when the bust happened, I didn't change a thing about the portfolio, because I'd learned that panic moves are what kill your ROI. Sure enough, the portfolio got back to even in 18 months and then took off from there. That taught me the value of dollar-cost averaging, too.

stinkygdnr, I don't know what OJ would say about your home, but our home was underwater for almost 10 years. It was pretty painful, but we consoled ourselves that heck, we had to live somewhere no matter what. In the end values went higher, although of course they've dropped again this past year. But in the long run, a home usually gives you some appreciation. Plus you get a lot of incalculable enjoyment from living in a place you can remodel and change to your heart's content. We liked our home, didn't love it, until we finished all the landscaping. Then we fell in love with it, finding it a real joy to just sit in the garden in a recliner, reading a book and drinking homemade lemonade. Like I said on a different discussion forum, very often it's the simplest pleasures in life that are the best!

August 12, 2009 at 2:26AM
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