Tuesday, May 09, 2006

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 ...


The Confused Capitalist

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