Allow me to introduce Scott Burns' soon-to-be-famous Missing Margarita Plan for making your first million. T-shirts to follow.
It started with a simple demonstration of the time value of money from Ted Troy, the managing director of Bowles, Troy, Donahue, and Johnson, a large Dallas insurance agency. He takes a sheet of paper and puts two numbers on it:
Age 65 $1,000,000
Then he asks, "do you think you can get money to grow at, say, 9 percent?"
If you agree, and most people do, he tells you that a 9 percent return will double money in 8 years. "Now let's work it backwards."
And he produces a series of figures like this:
Age 57 $500,000 Age 49 $250,000 Age 41 $125,000 Age 33 $ 62,500 Age 25 $ 31,250
"Doesn't look so difficult, does it?" he says.
And it doesn't. If you can put together $31,250 by the time you are 25 or $62,500 by the time you are 33, you'll have enough saved AT THAT TIME so that you won't have to save another dime for the rest of your life.
To put this baseline figure in some perspective, the $31,250 is about a year of income for a college graduate with a few years of work experience. Take it back another 8 years and the cost is $15,625--- about the price of a Volkswagen convertible.
A million dollars may not be what it once was but it is still an awesome figure... far more than most people accumulate in a working lifetime. Yet if you look at it from the other end of a career, the possibility of a million dollar retirement is no more than a year of income or, maybe, the shiny car that some parents buy for their teenager.
Think about that. Early saving can produce some major lifetime benefits:
• Eliminate the need to save more, later, for longer
• Eliminate worry about Social Security
• Eliminate worry about corporate pensions
• Provide an above average retirement income for a long as you live.
Still nervous about getting the original sum together?
I understand. So lets extend the deadline another 8 years: if you can't put the money together by age 25 or age 33, you can still retire with a cool million if you manage to put together $125,000 by the time you are 41.
Alas, while these figures are less intimidating than $1 million, it is still far more than most people accumulate.
So the question remains: how do you put the original stake together?
One answer is obvious: You pick your parents or grandparents as carefully as possible. A gift from a generous parent or grandparent when a person is young can do a great deal more than a much larger inheritance later.
You can confirm this by talking to Donald Trump.
But there is still another answer. One that does not require anything but having the fortitude to save every year: use an IRA. Whether the contribution is tax deductible or not, the annual earnings are tax deferred and a contribution of $2,000 a year will accumulate to the stake you need. If, for instance, you put aside $2,000 a year from age 21 to age 41 and earn 9 percent compounded, you will accumulate just over $120,000.
Similarly, if you put aside $2,000 a year from age 21 to age 33 and earn 12 percent--- a return available in growth stocks--- you will have $62,000 by the time you are 33.
If you save, in other words, it can be done. Not as a lifetime savings project. Not as relentless drudgery. Just put aside $167 a month for somewhere between 12 and 20 years when you are young and you'll have a cool million at 65.
That calculates out to about the price of a margarita a day. So if you can miss one margarita a day, you can be a millionaire.
Easier said than done, of course.
But consider trying to do the same thing from the other end of your working life. If you start saving at 50 (when most people do) you'll need to put aside about $26,000 a year to accumulate the same million by the time you are 65. It may be difficult to give up a margarita a day when you are in your twenties--- but it's virtually impossible to save over $2,000 a month when you are in your fifties.
Is a million more than you'll ever need?
You can scale back. Give up fewer margaritas.
(Note: This column was first published on Sunday, July 23, 1989. If you were 22 in 1989 and invested $2000 in an IRA starting on August 1, 1989 and had invested in the Vanguard 500 Index fund, you would now have $69,479--- more than you'd need to grow to $1 million by age 65.)
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