David B of How Do People Get Rich points out the power of compound interest. I don’t know if I’ve directly discussed it in this blog – I may have taken it for granted that if you found me your fairly well versed in a few basic principles of investing. If you need refresher, check out David’s page – I’ll wait…
Good, glad you came back. One thing that I pointed out in his website is that compounding inflation can diminsh some of the gains. Taxes and investment fees will also eat into them. By the time you are done, 40 years of investing isn’t quite as rosy as many investment magazines and websites would have you believe. About.com has a compound interest calculator that you may find helpful.
I don’t have children yet, but I’m at the age where it will be here before I know it. When junior is born, I plan of putting at least $10,000 aside in a portfolio (probably centered around ticker symbol VTI) for his retirement. I’ll look for some ways to make it tax-friendly, but spend a minute with that calculator and play with how interest compounds over 65 years. I calculate that I can probably get a 6.5% interest gain after inflation and fees. That $10,000 investment will allow my son or daughter to have $600,000 when he retires. And that will be in today’s dollars since I’ve factored in inflation.
The only problem I see with this plan is that it might provide a little too much cushion for my offspring. I want my him/her to be able to make his/her own living instead of being lazy like me. To do that, I’ll need to get some lawyer to set up a trust that allows him/her to access the money only on the condition that he/she can do the same for his/her children.
I don’t have the full plan figured out at this point. However, I’ve got some time to figure it out. Give me feedback on any loose ends I have forgotten.