Thursday, October 10, 2013

Opportunity Cost for Investing

Today I came across an interesting article in the newpaper. The title states to start investing early to accumulate more wealth. The opportunity cost for delaying 10 years can be up to $350K!

This has got me thinking on my projection of my investment goal. Based on MOM website, the current retirement age is 65. Assuming I have another 30 years of work life (this assumption requires that during these 30 years, nothing bad happens that affects my employability and significant change to my expenditure), and each year I will be able to inject $15K to my portfolio. I have excluded compounded income from reinvestment to give buffer for my calculations. At the end of 30 years, I should be able to achieve at least or in the range of $450K.

Assuming an average yield of 6% on $450K (Yes, I know... there are many assumptions here. But since we don't have any special power to predict what will happen in the future, we can only calculate based on assumptions to have a rough estimate of the picture, no?), the monthly passive income at the retirement age is about $2250.

This gives me a positive indication that if I will to work towards my goal, financial independence is achievable. When retirement kicks in, as long as I live within my means below $2K/month, I would be able to maintain my lifestyle. Of course, then we may ask what about inflation? Surely $2K today will not be able to buy things worth of $2K in 30 years time? As mentioned, I have not taken into consideration the compounded returns for reinvestment. I would consider $450K as the lower limit scenerio. And what is to stop us from further injection to our investment? Surely, with $2K/month there can still be sufficient amount to allocate for reinvestment (afterall, I am still able to spend less than $2K/month as of now).

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