Sunday 30th September, 2007


The $3 million challenge

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Ever wondered what $25,000 put aside now, will be worth in 25 years? Put another way, what is the future value of $25,000? Or have you wondered how much you need put aside now if you want half a million dollars in 25 years?

There is one assumption that you need to make, it is the rate of return or dividend that you would get over the number of years.

To make the calculation simple we assume that the rate of return will not change.

In addition, we may want to see what $25,000 set aside every year for 25 years will yield.

If you stash away $25,000 now and don’t touch it for 25 years, assuming a return on investment of 10.5 per cent, you would have $303,387. If you added $25,000, each year without fail, you’d accumulate $2,929,692.00.

The future value of $25,000 at present is thus $303,387, after 25 years. The future value of a stream of cash flows of $25,000 for 25 years is close to three million dollars.

But in terms of CSO population statistics maybe only 20 per cent of our people can actually afford such a long-term commitment. In fact, at least 46 per cent of workers may never achieve such a goal, and the 16 per cent, who live below the poverty line, with a monthly income of $650, will have to depend on lady luck.

The recent revelations of the inadequacy of the pension being received monthly by outstanding public servants are alarming. Recent legislation has raised the public service pensions to $1,650 per month.

Can you imaging having to live on $1,650 per month when you are old? But you have a choice?

If you cannot go after three million because of income constraints, can you go for half a million? It requires $4,300 per year for 25 years at 10.5 per cent per annum, to give you $500,000 then. Now that will give a pension of about $2,500 per month.

The big question is what can $2,500 buy, 25 years from now?

Inflation rate is an important factor. Most developed and developing countries try to mange their inflation rate so that it stays below three per cent.

So will you depend on state welfare? Some will have no choice! But can you make a different choice for your children?

The answer is yes, and the first action you take is for their education. Better paying jobs come with better education. Education is now almost free. Better pay leads to a greater capacity to save.

Recent legislation on the tax shelter for long term savings supports a view that saving $25,000 per year is a good recommendation. In fact, the incentive is that, from 2008, if you saved $25,000 per year in your pension or annuity plan, you get a refund of $6,250 if you are in the 25 per cent tax bracket.

Anybody who could afford it, should save $25,000 next year, in their pension or annuity. Since it will put cash back in your hand to the tune of $6,500, you are effectively out of pocket only $18,750.

If you never put another cent into the account, the effort of one year only, will result in some $300,000 25 years later.

So what is the future value of your present value of savings? Set yourself a personal challenge, and multiply your future net worth. You will not have to say: I should have, or, if only someone had told me!

©2005-2006 Trinidad Publishing Company Limited

Designed by: Randall Rajkumar-Maharaj · Updated daily by: Nicholas Attai