The Risk Of Low Investment Returns

by Brahma S. Varma
(Surrey, BC, Canada)

Everybody works hard and saves money to build a golden nest for his or her future. But few people are going to succeed in accumulating substantial amount of money even after 30-40 years. In this article, I am going to discuss how the low returns can sabotage all your financial dreams. After adjusting for inflation, and income-tax, the Real Value of your money in GICs may be less than what you put in. For example, your $10,000 in RRSP at 3%, after 40 year will become $77,663. After paying income-tax you will have less than $50,000. At 3% the inflation, the buying power of $50,000 will be approx. $14,000 which is not much. Is this what you wanted to get after 40 years?

Generally, not many investors fully comprehend the significance of the Rate of Return (RoR) on the value of their money in the future. That is why, even after a decade of low interest rates, studies show that over 80% of Canadians still have their money locked into 1 to 5 year bank or trust company GICs.

The investment planning experts list the following risks or hurdles to building a secure financial future. They are:
Sickness, Disability, Death, Loss of savings due to unemployment, sickness or disability, Inflation, taxes, market volatility, loss of capital, business failure, business partner?s death, or Long-term disability.

People fail to realize that low Rate of Return (RoR) is the biggest real risk. It can do irreparable damage to their future dreams. The following examples show the impact of low RoR:
HOW MUCH MONEY WILL YOU HAVE AT THE END OF A GIVEN PERIOD?
Table 1: Making a one-time investment of $10,000, assuming tax-exempt accumulation
(Such as in RRSP, Universal Life insurance plans)

End of Low Return Higher Rates of Return
Years 3% 10% 13% 15%
10 11,808 17,531 20,814 23,349
15 19,157 34,950 45,672 54,717
20 27,676 63,002 91,470 117,810
25 37,553 108,182 175,850 244,712
30 49,003 180,943 331,315 499,957
35 62,275 298,127 617,749 1.41 Mln.
40 77,663 486,852 1.14 Mln. 2.05 Mln.

Table 2: Investing $5,000 annually, assuming tax-exempt accumulation (Such as in TFSA, RRSP, Universal Life insurance plans)

At the GIC Higher Rates of Return
End of 3% 10% 15% 20%
10 yrs 69,833 100,625 136,974 186,711
15 yrs 103,574 195,635 314,273 509,246
20 yrs 147,413 348,650 670,883 1.3 Mln.
25 yrs 198,234 595,082 1.4 Mln. 3.3 Mln.
30 yrs 257,150 991,964 2.8 Mln. 8.3 Mln.
35 yrs 325,449 1,6 Mln. 5.7 Mln. 20.7 Mln.
40 yrs 404,627 2.7 Mln. 11.6 Mln. 51.4 Mln.





































































































End Of 3% 10% 15% 20%
10 Yrs. $69,833 $100,625 136,974 186,711
15 Yrs. 103,574 195,635 314,273 509,246
20 Yrs. 147,413 348,650 670,883 1.3 Mln.
25 Yrs. 198,234 595,082 1.4 Mln. 3.3 Mln.
30 Yrs. 257,150 991,964 2.8 Mln. 8.3 Mln.
35 Yrs. 325,449 1.6 Mln. 5.7 Mln. 20.7 Mln.
40 Yrs. 404,627 2.7 Mln 11.6 Mln. 51.4 Mln.



Click here to post comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Investment Opportunities.