Sunday 29th April, 2007

 

Awareness profits future returns

 
 
 
 
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Researcher at University College, London, Prof John Adams developed the risk compensation hypothesis in studying road accidents and found that people take note of their environment and modify their behaviour, in terms of their propensity to take risk, in return for some reward.

Little is different in personal financial planning, except that the future always seems a long way off, when people contemplate accumulating a comfortable quantum of money, sufficient to signal financial independence.

For the vast majority of us, our children take centre stage. We want them to have the good things in life.

But it is a few of us who recognise that while money can’t buy me love, according to singing group The Beatles, money buys goods and services that allow our children to have the good life of comfort and well-being, within the context of a good value system.

We saw last week that if you tabulated all earnings over a 40-year work life, an average worker starting at $2,500 per month at age 19, with salary increases would have earned some $1.2 million by age 40. Assuming his average monthly earning from age 40-60 is $8,500, he would have earned another $2.04 million by age 60. That’s an average of $3.24 million over a lifetime.

Be a millionaire

We could assume that such a worker would have acquired some assets along the way: a car and a house at least from that money. But he could also have created millionaires of three children as well, simply by putting aside a small sum for each child when the child reaches 18. Would you like that for your child?

In today’s market, the single lump sum of $47,400 set aside now, in a dividend yielding account can do that. The average yield on the account is calculated to be ten per cent per annum. The accumulated total at attaining 50, will be a few dollars more than 1 million.

Also, if you set aside $5,000 for a five year-old, when that child reaches age 50, the sum total assuming the same ten per cent return per year, will be: $364,000. If, when you were aged five, some loving grandparent had set aside $5,000. for you, with strict instructions that you could only get it when you attain the age of 50 years, would you be delighted to have it at age 50? Of course you would!

Now assuming you are aged 50, and you collected $364,000, and you now set it aside to your age 65, do you know what you would get? You would have a little more than $1.5 million for your pension. At age 65, the average individual annuity plan will begin to pay you a pension.

Such an annuity will give you a lump sum of 25 per cent of the total money upfront, and then you will get a monthly cheque of about $9,000. That cheque will be paid to you as long as you remain alive.

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