How much do you need to retire comfortably and live well?
Know This First
You need to have passive incomes from your investments during your retirement years.
“Rich Man, Poor Man” by Richard Russell
Russell, who penned the Dow Theory Letters for nearly six decades, was one of the most respected financial writers in history, and “Rich Man, Poor Man” is his most influential piece.
The following is the extract of its Dow Theory Letter “Rich Man, Poor Man”.
Russell used the example of two young men. One started contributing $2,000 per year to his IRA at the age of 19 and stopped investing new money at age 25. He never invested another penny after turning 26. The second young man started contributing $2,000 per year at age 26 and continued to do so for the following four decades. Both enjoyed 10% annual returns. At the age of 65, guess which one had more money?
Almost incredibly, the first young man – who started at 19 and stopped at 25 – amassed a larger fortune than the second young man once you subtracted the initial investment… despite the fact that the second young man invested nearly six times as much money over a much longer period of time.
The following is the table used in Richard Russell’s timeless piece “Rich Man, Poor Man.”
| Investor A | Investor B | |||
| Age | Contribution | Year End Value | Contribution | Year End Value |
| 19 | 2,000 | 2,200 | ||
| 20 | 2,000 | 4,620 | ||
| 21 | 2,000 | 7,282 | ||
| 22 | 2,000 | 10,210 | ||
| 23 | 2,000 | 13,431 | ||
| 24 | 2,000 | 16,974 | ||
| 25 | 2,000 | 20,872 | ||
| 26 | 2,000 | 2,200 | – | 22,959 |
| 27 | 2,000 | 4,620 | – | 25,255 |
| 28 | 2,000 | 7,282 | – | 27,780 |
| 29 | 2,000 | 10,210 | – | 30,558 |
| 30 | 2,000 | 13,431 | – | 33,614 |
| 31 | 2,000 | 16,974 | – | 36,976 |
| 32 | 2,000 | 20,872 | – | 40,673 |
| 33 | 2,000 | 25,159 | – | 44,741 |
| 34 | 2,000 | 29,875 | – | 49,215 |
| 35 | 2,000 | 35,062 | – | 54,136 |
| 36 | 2,000 | 40,769 | – | 59,550 |
| 37 | 2,000 | 47,045 | – | 65,505 |
| 38 | 2,000 | 53,950 | – | 72,055 |
| 39 | 2,000 | 61,545 | – | 79,261 |
| 40 | 2,000 | 69,899 | – | 87,187 |
| 41 | 2,000 | 79,089 | – | 95,905 |
| 42 | 2,000 | 89,198 | – | 105,496 |
| 43 | 2,000 | 100,318 | – | 116,045 |
| 44 | 2,000 | 112,550 | – | 127,650 |
| 45 | 2,000 | 126,005 | – | 140,415 |
| 46 | 2,000 | 140,805 | – | 154,456 |
| 47 | 2,000 | 157,086 | – | 169,902 |
| 48 | 2,000 | 174,995 | – | 186,892 |
| 49 | 2,000 | 194,694 | – | 205,581 |
| 50 | 2,000 | 216,364 | – | 226,140 |
| 51 | 2,000 | 240,200 | – | 248,754 |
| 52 | 2,000 | 266,420 | – | 273,629 |
| 53 | 2,000 | 295,262 | – | 300,992 |
| 54 | 2,000 | 326,988 | – | 331,091 |
| 55 | 2,000 | 361,887 | – | 364,200 |
| 56 | 2,000 | 400,276 | – | 400,620 |
| 57 | 2,000 | 442,503 | – | 440,682 |
| 58 | 2,000 | 488,953 | – | 484,750 |
| 59 | 2,000 | 540,049 | – | 533,225 |
| 60 | 2,000 | 596,254 | – | 586,548 |
| 61 | 2,000 | 658,079 | – | 645,203 |
| 62 | 2,000 | 726,087 | – | 709,723 |
| 63 | 2,000 | 800,896 | – | 780,695 |
| 64 | 2,000 | 883,185 | – | 858,765 |
| 65 | 2,000 | 973,704 | – | 944,641 |
|
Less Total Invested: |
(80,000) | (14,000) | ||
|
Net Earnings: |
893,704 |
930,641 |
||
|
Money Grew: |
11-fold |
66-fold |
Making Money: Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years.
He offers the following rules that you must be aware of if you are serious about making money.
Rule 1: Compounding: One of the most important lessons for living in the modern world is that to survive you’ve got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation – any money.
There are two catches in the compounding process.
- Compounding may involve sacrifice (you can’t spend it and still save it).
- Compounding is boring. It’s boring until (after seven or eight years) the money starts to pour in.
Rule 2: Don’t Lose Money: If you want to be wealthy, you must not lose money. DO not lose big money—in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in your own business.
Rule 3: Rich Man, Poor Man: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur, and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN’T NEED THE MARKETS. He already has all the income he needs. In other words, the wealthy investor never feels pressured to “make money” in the market. He puts his money only where the great values are.
If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time, he’d have money coming in daily, weekly, monthly, just like the rich man.
Rule 4: Values: The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. He judge an investment to be a great value when it offers (a) safety; (b) an attractive return; and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.
There is no shortcut to become wealthy unless you marry someone rich or born into a rich family.
For the great majority of investors, making money requires a plan, self-discipline and desire.
You could live well at your retirement years!
Reuben Ong