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Wednesday, 13 December 2006

How Much Money

NCN did an interesting post that listed how much he had earned so far, and how much he could have saved up by now (if he'd saved 10% of his income every year) compared to what he's actually accumulated (starting a couple of years ago).

I thought I'd run through the same process myself, just for interest:

"How much money have I made during my lifetime."

Here are the details. I'm almost 45, and I've worked since I was about 14 (part-time during high-school doing a paper round, market gardening, storeman & packer and music tutor, and then during uni vacations working in a pencil factory). The breakdown:

Year Salary
1974 200
1975 300
1976 400
1977 500
1978 1000
1980 2000
1981 2000
1982 2000
1983 5000
1984 14000
1985 16000
1986 18000
1987 20000
1988 22000
1989 24440
1990 27926
1991 31985
1992 34695
1993 37678
1994 38509
1995 38924
1996 38924
1997 40481
1998 41695
1999 39047
2000 40286
2001 55714
2002 58093
2003 66261
2004 68249
2005 73602
2006 75810

These are rather rough estimates (but pretty close) for the early years. I got my first "real" job in 1984 working as an "engineering trainee" while finishing off my first degree.

So, how much money have I made, in salary, over the past 32 years? $935,719. Now, for some folks, that's not much money, and for others, it's a lot of money. Whatever you think about the amount you have to admit that it is a pretty decent chunk of change. To continue with NCN's method of analysis... Where would I be if I had SAVED 10 percent of my salary, at say 8 percent interest, per year. And how does this compare to where I'm actually at. Let's run the numbers:
Ten Percent End Of Year
20 21.60
30 55.73
40 103.39
50 165.66
100 286.91
200 525.86
200 783.93
200 1,062.65
500 1,687.66
1,400 3,334.67
1,600 5,329.44
1,800 7,699.80
2,000 10,475.78
2,200 13,689.85
2,444 17,424.55
2,793 21,834.53
3,199 27,035.67
3,470 32,945.58
3,768 39,650.45
3,851 46,981.46
3,892 54,943.77
3,892 63,543.06
4,048 72,998.46
4,170 83,341.39
3,905 94,225.78
4,029 106,114.73
5,571 120,621.02
5,809 136,544.75
6,626 154,624.51
6,825 174,365.37
7,360 196,263.61
7,581 220,152.18

At the end of the 32 year period, I would have had 220,152.18 in my retirement account. Not bad. Instead, I have about 304K, as I've been putting in more than 10% and have averaged more than 8% by investing in the "high growth" funds available in my retirement account. Now, for the sobering reality. Ready? If I NEVER put another dollar into retirement, but left that 304K to grow at 8 percent, how much money would I have in, say, 20 years when I'm ready to retire?

Over $1,026,000.

Yep, that's right. I've saved around 10 per cent of my income while working, and in another 20 years I should have over $1,000,000 dollars in my retirement account, without ever saving another cent.

Wow! Now, as you can see, I have "low-balled" my estimates. I assumed a VERY modest amount of savings, and a very, very modest rate of return, which is why I actually have 38% more in my retirement account than this model predicts. If I just stick with the conservative 8% return and don't contribute any more I STILL would have over 1 MILLION dollars in my retirement account. This shows how important time is.

In reality, I'm now saving around 20% of my salary into my retirement account and will continue to do so. Assuming I earn to same amount for the next 5 years and then take a pay cut when I take up a high school science teaching job, I'll end up with $1,401,207 at 65. The recent Australian tax changes mean that my retirement account earnings are only taxed at 15% and the final benefit, taken as either a lump sum or a pension, will be tax free. So this should be enough for a comfortable retirement. In fact, based on my current spending and the fact that I won't have a mortgage when I retire, I'll probably have more income than I need and will be able to increase my savings rate when I'm "retired". I suppose at that time I'll have to consider myself a "professional" investor. After I've completed my teaching qualification and Master of IT I may enrol in the Master of Finance course my wife is currently doing so I can officially call myself a "pro" ;)

My other assets (around $700K) will continue to be invested in real estate and stocks, even after I retire, so this should provide a sizeable estate for my two sons and their heirs. I've already set up retirement accounts for each of them, so they should end up with a comfortable retirement even if they never contribute anything to their retirement accounts.

It's amazing what you can achieve on a "modest" salary via a regular savings plan and sensible investments over the long haul.

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