Thursday, January 31, 2008

* Passing the Torch - Part 2 of 2

Yesterday in part 1 of Passing the Torch, I posted the story of Jack and Jill's journey to retirement. The synopsis of the story is that Jack contributed less than one-third of what Jill contributed toward retirement, but his final nest egg was over twice as large.


When questioned by Jill how this happened the father explained that the most important aspect of investing is not how much you contribute, but when you contribute it. Attached here [JackJill.xls] is the spreadsheet used to generate the schedule comparing Jack and Jill's results.

If you want to compare how well you are doing versus Jack and Jill, find your age in column B, then on that same row enter the value of your equity investments in column K and finally enter the amount you expect to contribute each year in column J. The amounts in col J can be adjusted by years if you so desire.

After entering the above, cell K6 will display your total contributions while cell K5 will display your estimated balance at age 65. The assumed rate of return can be changed for all three in cell E4, or individually overridden in cells H4 and K4.

As always, I hope you find this model entertaining and useful.

Discussion items raised by my kids:
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Q1: Wow, that's neat. Are you saying I can skip college, work 10 years and save $5,000 a year, then I can kick back and do whatever I want for the rest of my life?

A1: No, in the story Jack had a financially difficult life (note references to meager earnings) since he did not go to college and adequately prepare himself to raise a family.
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Q2: But if Jack remembered the money, he could have used it to have a better life.

A2: The power of compounding is tied to time. If Jack were to make withdrawals prior to his retirement, that would significantly reduce the final amount, and in some cases eliminate the entire balance.
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Disclaimer: This model is for illustrative and educational purposes only. The author and Dividends4Life makes no claims or assertions as to the model's accuracy, completeness, appropriateness of use, or any other claim or assertion. You should not rely on this model or base any financial decisions on it.

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