Friday, January 19, 2007

Compound Interest

In the midst of my annual re-examination of my retirement plan, I'm prepared to accept the unconfirmed rumor that Einstein once said that compound interest is the most powerful force in the universe. For more than three years, I've been in the unenviable position of using my savings for living expenses. I'm also in the, perhaps enviable, position of having a very modest lifestyle and consequently no long term debt whatsoever. That is to say, I have only one credit card with a balance I pay off every month, no car loan, no mortgage, no student loan, etc. I really can't afford to pay someone else to buy my car for me. Even if I could, I'm not sure I'd want to.

When I decided to stop looking for a full time job, I wasn't sure I could pull it off. But this year, for the first time, it seems that, barring a global cataclysm, it will work. Apparently, given current conditions (12% return on investment and 4% inflation) I can live forever and still (Maggy, stop reading here!) leave my daughter a million dollars or more. Let me hasten to add, I don't have anything like a million dollars now. My assumptions in past years made it look like I could only afford to live to age 82. But conditions in the past three years have been better than I expected. Now, with just a little tweaking, my plans can even accommodate conditions much worse than the current 12% ROI and 4% inflation.

One interesting aspect is the effect of Social Security Insurance. For most people, the later you begin collecting Social Security payments, and assuming you live at least six years after that point, the more money you get in total over your life from Social Security Insurance. For me, since I'm using savings to cover living expenses, the sooner I start collecting Social Security payments, the longer my savings remain above the point where investment results exceed my modest budget.

So, it looks like I can afford that roof repair after all. And maybe eventually the garage and back porch I've been thinking about. I'm telling you, it's a very modest lifestyle.

3 comments:

TJP said...

Using your savings to pay bills si not a great idea unless you have no choice whatsoever. Why not try some free lancing work? You can get paid to write content for others, and cna easily earn at least $100 a day. Just write 5-10 400 word articles an day, and you will reach that goal fairly soon.

As for compound interest, I found it's easiest to just calculate compound interest and figure out what I need to earn to beat inflation. If your time horizon is long, you can save just a few dollars today to accumulate a small fortune tomorrow.

Mary Ann said...

There's surely no way I'm going to take investment advice from someone who doesn't reread what he's written and correct the typos.

I'm also not taking any advice from someone who didn't understand what I wrote. At your age it's certainly important to sacrifice a bit to save whatever you can. But you'll notice that I wrote that I'm retired. I did save regularly when I was younger and I did accumulate a small fortune. And now I'm spending it. That's what I saved it for.

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