Put time on your side

By Mary Holm

Monday 21st January 2002

The power of time when you're saving is well illustrated by some recent US television commercials.

"At $6,500," said one, "this world-renowned designed timepiece could cost you more than $30,000 in retirement savings."

Said another, "This $70,000 car might steer you to other options if you knew that money could earn over $326,000 in potential retirement savings."

"This is great psychology", says a recent Money Online newsletter. "Get spenders to save by making saving look like another form of spending - one where you just get more for your money."

What's happening in the examples in the ads, of course, is that $6,500 or $70,000 will turn into much larger amounts if they are invested over the long term.

You get even more dramatic growth, though, when you make regular savings - as opposed to one lump sum.

If, for instance, you save just $100 a month - an amount many of us wouldn't really miss - at 2 per cent a year, it will grow to almost $30,000 over 20 years.

Over 30 years, it will total almost $50,000; over 40 years, $73,000; and over 50 years, more than $100,000.

Note that the return is only 2 per cent. People who are trying to sell you investment products often use, say, a 10 per cent return. It certainly makes the numbers grow much faster, but it's dishonest.

When we're looking at returns, they should be after fees and after taxes. It's also better to take inflation into account.

I used 2 per cent because that's the average return a conservative long-term investor - who holds quite a lot of fixed interest, some share or share funds and probably some property - might expect to make after fees, taxes and inflation.

By including an inflation adjustment, we can say, for example, that the $30,000 after 20 years will buy you what $30,000 buys now.

A more risk-tolerant long-term investor, happy to invest most of their money in shares or a share fund, might expect an average return - again after fees, taxes and inflation - of 5 per cent.

At that rate, $100 a month will grow to $40,000 in 20 years; $82,000 in 30 years; nearly $150,000 in 40 years and more than $250,000 in 50 years.

Two points about these numbers:

- If you have the courage to go largely with shares or a share fund, and therefore get a higher average return, that makes a big difference - especially over really long periods.

After 40 years, the savings total at 2 per cent is less than half the total at 5 per cent.

Many New Zealanders feel they can't cope with the ups and downs of share investments.

But those who hang in over the decades are inevitably rewarded.

- Ten years makes a huge difference, particularly on a 5 per cent investment.

Someone who saves $100 a month for 30 years ends up with more than twice as much as their mate who does it for 20 years. And the money almost doubles again if you go from 20 to 30 years and 30 to 40 years.

This might all seem rather discouraging to older readers, who haven't even got 20 years to play with.

The fact remains, though, that even short-term saving is pretty effective.

With just the 2 per cent return, if you save $100 a month for five years, you'll have more than $6,300. And after ten years you'll have more than $13,000.

Meantime, if you can persuade a 20-year-old to start saving the same amount at 5 per cent, she or he could be a quarter millionaire at 70. And that's with the buying power of today's dollars.

It's not bad for less than $3.30 a day.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net or by mail care of this newspaper. Sorry, but she cannot respond directly to readers.

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