Turn $200,000 into $13 Million?
By Kevin Estes
How to Build Wealth
Many people want to get rich now.
That leads them to:
invest in risky opportunities
launch business after business
buy lottery tickets
That’s not (usually) how wealth is built.
Want to know the secret?
Time.
Average Billionaire is 66
According to Forbes:
The average billionaire is 66.
Every billionaire under 30 inherited his or her fortune.
Young heirs lower the average. Self-made billionaires are even older.
“Rule” of 72
The “rule” of 72 is a quick way to estimate about how long it takes an investment to double.
Simply divide 72 by the annual growth percentage as a whole number:
4% annual growth doubles in about 18 years (72 / 4)
6% annual growth doubles in about 12 years (72 / 6)
8% annual growth doubles in about 9 years (72 / 8)
12% annual growth doubles in about 6 years (72 / 12)
“Rule” of 72 Error
However, the “rule” of 72 is more like a guideline. It’s imprecise and most accurate at 6-9% annual growth rates.
For more check out: Are You Less Behind Than You Think?
Growth Example
Let’s assume someone who’s 30 years old has saved and invested diligently. They have a Roth IRA worth $200,000.
That’s helpful because they might not need to:
pay taxes or
take Required Minimum Distributions.
They’re also fortunate in that they:
don’t need this money,
earn a 7.2% annual return, and
live to 90 years old.
Napkin Math
Using the “Rule” of 72, their funds would double about every decade:
$200,000 at age 30
$400,000 at age 40
$800,000 at age 50
$1.6 million at age 60
$3.2 million at age 70
$6.4 million at age 80
$12.8 million at age 90
More Precise
Due to the “rule” of 72’s error, the actual values could be a little higher:
After Inflation
Inflation could erode the purchasing power. As long the growth rate is bigger than inflation, the real value will grow well above $200,000.
Let’s assume inflation will be 2.54% a year.
With 7.2% nominal annual growth and 2.54% inflation, the real annual return would be about 4.55% (1.072 / 1.0254 - 1).
In today’s dollars, it would grow to:
That’s almost $3 million in today’s dollars. It’s nearly 15 times the $200,000 today!
Power of Compounding
Warren Buffett’s long-time business partner Charlie Munger said:
The first rule of compounding is to never interrupt it unnecessarily.
Starting early gives investments longer to grow.
Let’s review a made-up example.
Nick
Nick saved $10,000 a year from age 22 until age 31 (10 years).
He hasn’t withdrawn funds
His investments earned a 7% annual return
Nate
Nate saved $10,000 a year from age 32 until age 67 (36 years)
He also hasn’t withdrawn funds
His investments also earned a 7% annual return
Who Has More
Nick contributed $100,000 ($10,000 a year for 10 years).
Nate contributed $360,000 ($10,000 a year for 36 years).
However, Nick has more at age 67!
Nick: $1,688,870
Nate: $1,593,374
Despite contributing nearly four times as much and only starting a decade later, Nate has less than Nick.
Here’s a graph of how their portfolios might have grown over time:
When’s the best time to plan a tree? 30 years ago.
The second best? Today.
I hope this helps!
If you’re interested in a review of your specific situation…
Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.