A $15,174,081 Christmas Dinner

I recently had a holiday dinner hosted by my paternal grandmother where the topic of conversation included the economy and the process of becoming financially independent. What was most remarkable was that most of the grandchildren in the room would have a fortune of more than $15,174,081 by the time they were my grandmother’s age if they could earn a 10% rate of return (the long-time average for buy-and-hold investors that reinvest their dividends in a broad based, low-cost index fund that tracks the overall market) and deposited only $5,000 per year. Even crazier - if this was done through a Roth IRA, they would never pay a penny in taxes. Not one cent.

You heard me right. With proper planning, a tiny bit of discipline, and a whole lot of time (which is the secret ingredient of compounding), every one of the dozens of members of the third generation sitting at that table could have a net worth measured in the tens of millions of dollars when they themselves were the ones hosting the Christmas get-togethers a half century in the future.

The bottom line: If you’re relatively young, getting rich is a piece of cake provided you don’t have serious health problems (even then, it can be done but it’s much more difficult because of medical bills and time lost from work). The real problem is that no one is telling young men and women the power of compound interest. You could be flunking out of high school and if you understand how it works, still retire with a couple of houses, a chef on staff, a personal assistant, or whatever else it is that brings you joy.

There’s little doubt that, God willing, when we all reach that age, several people at that table will be destitute, most will be middle class, and a few of us will be worth astonishing amounts of money. For all it’s power, compounding can’t overcome human nature.