Last week we looked at the marketing hype around growth investments. This week we’re looking at math and hey…the numbers don’t lie!

Simply put, the compounding effect of regular savings and investment returns over long periods of time does not support growth investments for the young as a wise move.

Growth Investment Example

To demonstrate, let’s jump ahead to the point in the lives of young investors to where they are 30 years old and have accumulated $30,000 of savings. They plan to keep working for the next 35 years, believe they can comfortably save and invest $4,000 each year (or $333.00 each month), and their goal is to have accumulated $500,000 in savings for retirement.

Age: 30 Years Old
Savings: $30,000
Retire at: 65 Years Old
Annual Savings: $4,000 ($333.00/month)
Goal: $500,000 in savings for retirement

What annual rate of return do they need to achieve their goals? By using a financial calculator, we calculate the required average annual rate of return their savings must achieve is 4.79%.  Interestingly, this rate of return would have been easily achievable in those 35 years by investing in safe, conservative investments like Guaranteed Investment Certificates (GIC) and bonds!

What If I’m Older?

Now, let’s look at the math for the same investor’s savings if you were to start later than 30 years of age. Let’s say you are 35, 40, 45, or 50 years of age. What is the rate of return your savings must achieve to reach your goal? That depends on at what age the savings began:

• If you start at the age of 35, your rate of return would need to be 6.11%.
• If you start at the age of 40, the rate of return would need to be 8.03%.
• If you start at the age of 45, the rate of return would need to be 11.03%.
• If you start at the age of 50, the rate of return would need to be 16.30%.

How do I Achieve a Return of 6.11% with Safe Investments?

Great question! The calculated returns (6.11% for a 35 year old) is based upon a conservative portfolio made up of Bonds, GICs and a few Preferred shares, today. (Over the past 10, 20 and 30 years, a rate of return above 6.11% was achieved by investing only in GICs and Bonds.)

Bonds and GICs have a maturity date, with the principal guaranteed by the issuers. Preferred shares do not have maturity dates and are not guaranteed, but they pay a very good annual dividend income.

Why Does Age Matter?

What that means, to say so more simply, is that if young investors started at 35 years of age and avoid growth investments, their $500,000 goal is still attainable with safe, conservative investments.

But, if investors start at 40, 45, 50 years or older, there is no way they can reach their goal by investing in GICs and bonds. Unfortunately, in these scenarios they would need to take on much more risk and invest in growth investments. Even then they might not attain their financial goal.

Math: Conclusion

So, what does the math say? The younger you are, the less risk you need to take on. If you are a young investor, you can achieve your financial goal by investing your savings in safe, conservative investments.

Next week I’ll walk you through the history of growth investments and show you how conservative investments have actually outperformed growth investments for the past 10, 20, and 30 years.

Read: Growth Investments for Young Investors | What Does History Say?

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