Time is on my side ...

Time is on my side, yes it is ... (apologies to the Rolling Stones) ... or at least it's on my kid's side.

I was thinking about this today with my two teenagers, and thought how little money it would take, with decades of compounding ahead of them, to fashion a comfortable retirement, some 50 years hence. Of course, compounding within the confines of a tax-deferred account will make it all the better.

So with that thought in mind, I considered what $5,000 could be worth with a little leverage working for them for a long period of time. Recently, Horizons BetaPro Funds announced two leveraged index mutual funds. Both are levered to produced twice the change as their underlying indices; which are the Canadian S&P/TSX 60 (the largest companies in Canada); or the NASDAQ index. Both funds are designed to mimic their index, except with twice the upward and downward movements. The MER on the S&P/TSX 60 index is 1.5%.

To consider what could become of $5,000 in a tax-sheltered account (IRA or RRSP), compounded for 50 years, I used considered a long-term rate for large companies of 10.5% annual return as reasonable (about 10.5% is a widely quoted number). However, this might be slightly optimistic going forward, so I scaled this back to 8-9%, say 8.5% as a long-term rate. With a fund leveraged like this, it would mean an 17% return over the long haul, less the 1.5% MER charged by the fund. This would leave a net return of about 15.5% per annum.

I then went over here to use the financial calculator, and this indicated that the $5,000, compounded at 15.5% over 50 years (in other words, when my children turn 65), would be worth $6,703,839 at the end.

However, inflation has averaged 3.15% per annum over the past 90 years. Accounting for that 3.15% inflation factor suggests that the $6.7 million will be worth the equivalent of $1.42 million in today's dollars. More than enough to provide a very comfortable supplement to whatever else they have accumulated for their retirement.

Excuse me, I'd like to continue talking to you, but I have to go speak to my wife about an idea I have ...


JW

The Confused Capitalist