Portfolio Size Matters
Everyone has a mouth, a pair of ears and eyes. And each of us need a basic amount of water, food and air to breath. When come to basic necessity to survive the minimum sum tends to converge.
A 500K of 10% return gives 50K annually. A Million dollar portfolio gives 100K.
If the minimal cost to survive cost 50K, for same investment performance, portfolio size can give you a life of luxury or lives like a beggar.
50K more can allow me to pay a 2 room OCR Condo monthly instalment at current high price, a nice holiday annually, a Car and a Happy Family.
When comes to financial planning, a long life may not be a good thing. Escalating medical cost and Inflation can extend your misery.
If the median age is 85 years old, you need to plan probably 90 at least. And this 5 more years can be one of your highest cost in life after you retired due to inflation and expensive medical care.
A dinner that cost $10 after 30 years of inflation at 5% will cost 4 times.
Monthly Insurance Premium
If we pay $200 monthly or $2400 annually for your insurance premium.
After 20 years, termination at 4% compound return is $74 326.
If you can achieve just 7% through investment, for the same period is $118 615.
That's 60% more ! Ofcourse that's provided you can achieve 7% consistently :)
A number of folks believe in teaching their kids on financial literacy early. Rather I feel to teach them importance of money but not investment. Reason being temptation can be high for them to earn quick money that they may not focus in their study and work.
Unless we have sugar daddy, saving up for the seed funds from hard work is important. What we can do as parent (if you are savvy enough) is to help your children to invest their money while they are climbing the corporate ladder instead.
To retire, we must invest because starting the first day of your retirement, absolute inflation cost facing you is at it largest at peak of your net worth. We need to break this inflection point.
A million dollar retirement fund at 3% inflation is $30k cost annually.
A 100K dollar retirement fund at 3% inflation is only 3k.
Is a good problem to have to retire with one million dollar but is a big problem if you fail to invest enough and safely.
8th Jan 2013