The Risk Of Low Returns

by Brahma S. Varma, President, Pro-Financial Planners Ltd.
(Surrey, BC, Canada, 604-585-7656)

We all work hard, save money and invest it to build a golden nest for our future. But few people are going to succeed in accumulating substantial amount of money after 30-40 years. In this article, we are going to discuss how the low returns can sabotage all your financial dreams. After adjusting for inflation, and 40% tax-rate, with 2% to 3% annual return, the Real Value of your money in would be going down.

Generally, not many investors fully comprehend the significance of RoR, the Rate of Return on the value of their investments over a long period of time. 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 financial planning experts list the following risks or hurdles to building a secure financial future. They are:
a. Sickness, Disability, Death, Loss of savings due to Unemployment, sickness or disability,
b. Inflation, taxes, market volatility, loss of capital, business failure, business partner?s death, or
c. Long-term disability

Seldom do people realize that low Rate of Return is the biggest real risk. It can do irreparable damage to their future dreams. The following examples show you the impact of low rates of return on your retirement plans. Refer to Table the RoR table given below.

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)

At the Low Return High Rate of Return
End of 3% 5% 10% 13% 15%
10 11,808 13,207 17,531 20,814 23,349
15 19,157 22,657 34,950 45,672 54,717
20 27,676 34,719 63,002 91,470 117,810
25 37,553 50,113 108,182 175,850 244,712
30 49,003 69,761 180,943 331,315 499,957
35 62,275 94.836 298,127 617,749 1.01 Mn
40 77,663 125,840 486,852 1.14 Mn 2.04 Mn

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

At the Low Returns High Rate of Return
YEARS 3% 4% 10% 15% 20%
10 65,759 69,833 100,625 136,974 186,711
15 103,570 113,127 195,635 314,273 509,246
20 147,413 165,802 348,650 670,883 1.31 Mn
30 257,150 307,859 991,964 2.83 Mn 8.27 Mn
40 404,627 518,138 2.66 Mn 11.57 Mn 51.42 Mn

Remember the Rule of 72: Divide 72 by the rate of return. The quotient gives the number of years your money will double.
For example, $10,000 @ 3% will become $20,000 in 24 years; while @12%, It will double in six years

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