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 cant
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. Thats 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 todays 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.