Everett Collection
As hard as it may be to believe, it's possible to turn a single $3,000 investment into $50 million in a single lifetime. I can't say that I have done it, but I'm going to show how you could.
This is a very tall order, one that requires an entire lifetime and more than one person to carry it out. If you're a parent or grandparent, you can do this. Someday, a child or grandchild could be very grateful that you did.
This is the fourth column in a series on compound interest, which was famously cited by Einstein as one of the wonders of the world. For worthwhile background, you may want to read the first, second and third columns in the series.
The plan I am about to describe isn't magic. It's a recipe with four essential ingredients:
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An initial investment of $3,000
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A Roth IRA
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An investment that's likely to grow at 12% over a very long time
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A long lifetime (plus ample patience).
Want to try it? Here's how, using an imaginary infant named Brendon for the example.
When Brendon is born, set aside a lump sum of $3,000. Invest it in an ETF or a mutual fund that holds small-cap value stocks. (To learn more about this check out my podcast called The Best Small-Cap-Value ETF .)
Leave the money in that asset class to grow. And grow. As soon as Brendon has taxable earned income, start contributing the money in the account to a Roth IRA in his name, keeping it invested in small-cap value. That way, at least under current tax law, it will never be taxed. Do this every year until all the money is within a Roth account.
Assuming that Brendon leaves this money alone and that it continues to compound at 12%, when he is 65 years old, your one-time $3,000 investment in small-cap value will be worth about $4.75 million.
That is still far short of $50 million. Let's follow the money and see how this scenario plays out.
Assume that at 65 Brendon starts withdrawing 5% of the balance of his small-cap value account every year. That first year, he takes out $237,281. (Compare that figure to your $3,000 investment.) Because the money continues to compound at 12%, his balance grows, and so do his yearly withdrawals.
When he's 70, he'll take out $323,572, based on his account value of $6.47 million. At 80, the account is worth slightly more than $12 million, and he takes out $601,710 — theoretically without any tax liability.
If we assume Brendon keeps this up until his death at 95 (his final annual withdrawal being $1.5 million), his account will be worth about $30.5 million. Starting at age 65, he will have taken out a total of $21.6 million. That final value plus all the withdrawals come to more than $50 million from your initial $3,000. And, presumably, very little of it will have been taxed.
So let's ask ourselves: What's wrong with this picture?
