Automatic Pilot, Part III
by Richard
Let’s pause to mark our progress to date.
Our Basic Assumptions
- You have a time horizon of thirty years before your anticipated retirement.
- You don’t mind marching to a different drummer. You are prepared to make investing a priority, and consumption a residual pleasure. Rather than the other way around.
- By now, you are fully in harness, steadily paying off your home loan while diverting your income upstream to fund 401k and Roth IRA contributions, and your HSA and Education IRAs when appropriate.
Where will this get you? Let’s run some hypotheticals.
If You Bought Your Home
Start with a $200,000 home purchase…very close to the national median price. Finance it with an 80% loan at 7% for 15 years. The monthly payment will be just a shade under $1,440.
This is not a heroic sacrifice. You would have paid something similar for rent anyway.
After thirty years, two pleasant results will emerge:
- Your cash flow has gone up $1,440 per month after 15 years. Just as if you got a $17,000 annual raise at work.And just in the nick of time, as you are now most likely in the “sandwich” generation, concerned both about your aging parents your college bound kids.
- And now after 30 years, assuming just 3.7% average annual inflation, your home is worth $750,000. Free and Clear.
Easy to see why everyone says your home is your best single investment.
But a money market account funded at the same initial level will produce the same result at the same stipulated rate of growth. Time and compounding and reinvesting did all the heavy lifting.
If You Funded Your 401k
Assume a $75,000 average salary, with 4% contribution both from the boss and your salary. That totals $6,000 combined per year, compounding at 10% for thirty years, that will grow to $987,000.
Look at the disproportion. Your never missed salary reduction is just a small fraction of what you paid on your mortgage. But look at the results.
Right away you have to admit, that the equity portfolio has bested the real estate.
If You Funded an HSA
And your HSA at $3,000 per year for thirty years also growing at 10%….mushrooms to $493,000—-less any draw-downs for medical care.
Don’t Forget the Kids
And the Coverdell (Education) IRAs? $2,000 at 10% for 18 years….$91,000.
Times however many kids you funded.
I know. Not enough for the entire tab, but it helps to put a dent in it.
Totally…
Take away all the Coverdell money, long since spent, and assume half the HSA fund was used to pay out of pocket medical costs during your working years, and that leaves a net worth of just a shade under $2 million.
This does not include a spousal 401k. Or spousal HSA contributions.
It’s almost impossible not to become financially independent by sticking to the straight and narrow path of savings and investment first, consumption later.
In Part IV, we let ourselves dream a little larger, painting the canvas with even more vivid colors.
