Hopeton Morrison, Contributor
SOME LOCAL financial institutions throw around the millionaire concept almost too generously. Increasingly, consumers are teased with advertisements inviting us to invest and become a millionaire in 10 years, or make your first million by following a few simple steps and so on.
It is really more complex than that.
One's millionaire status must be benchmarked against a global standard and the most readily acceptable one is the greenback. So, with the Jamaican dollar hovering around J$66 to US$1, you are not truly a millionaire until you have a net worth of at least J$66 million at this point in time. So then, how do you go about becoming a millionaire in Jamaica today? Here are some first steps:
It was George Bernard Shaw who wrote that "Youth is wasted on the young." There is a world of difference between starting out early on your investment journey and coming on board late. Even the most conservative person is well ahead of the game when he or she starts young. We look at four scenarios below:
Mary Wise is 23 years old and invests for 42 years of her working life to age 65. With an initial investment of $100,000 and a small but consistent investment of $10,000 monthly offering 12 per cent average annual return, she can retire at 65 (if she chooses to wait that long) with over $133 million in the bank. And even if she had chosen a more conservative route and decided to invest in safe fixed-income instruments taxed at 25 per cent per annum, she would still be showing over $69 million in 42 years.
John Thrifty is 35 and invests for 30 years as he eyes another 30 years to go to retirement. If he invests $12,000 monthly with an average annual return of 12 per cent, he will sit on $67 million at 65.
Joe Spender is 45 and recognises that with 20 years approximately to retirement, time is not on his side. Drastic measures are required to achieve millionaire status. Even though he makes an initial investment of $1,000,000, that is not that big a deal in the overall results. What is crucial is that he invests $85,000 monthly, earns 10 per cent average annual return and with that he will pull down approximately $68 million at age 65.
Finally, there is Susan Chance who is a 30-year-old high flier. She makes an initial investment of approximately US$1,000 (J$66,000). She invests a mere J$10,000 for the next 30 years. The big difference here is that she is also a high-risk-oriented achiever, goes for the big returns and ends up earning 20 per cent average annual returns. At age 65, she will show returns of over $104 million after 35 years of prudent investing even if all of her earnings were to be taxed at 25 per cent. But even here we are understating her profits, as some, quite likely most of her investments will be tax free.
Some assumptions in all four scenarios:
Calculations are based on the nominal value of money.
An approximate conversion rate of J$66: US$1 as of today is used.
The returns are based on compounding so persons would not be withdrawing funds from their investments prior to maturity.
A reasonable question, then, would be what happens in 10, 20, 30, 40 years time if the local dollar continues to devalue against the greenback?
That speaks to the time-value-of-money concept which we will examine in another column in the future. In the meantime, the prudent financial response is to hedge against this depreciation by proportioning some or all investments into hard currency securities, possibly including real estate. A second investment strategy is to go for asset class diversification as the local and global investment environment changes over the period.
Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com
