When I started this blog, I wrote about my goal of reaching Financial Independence by 2040. Let’ the moment, and that my age is around 24, how will things look in 2040?
- It’s normal to consider an annual average growth somewhere between 6 % to 10% in the stock market. I will be using 6% in this calculation.
- I’m going to use a yield at 4%
- I’m going to be pessimistic and say that I only add $2,000 each year, annually
- The investment horizon is 23 years, 2040 – 2017 = 23
- I’m going to show you one without reinvestment (DRIP = NO), and one with (DRIP = YES), and one with a bit more annual addition.
- I’m neglecting inflation and wealth tax this time since the big variable is future salary. When that variable is set in stone, I’ll recalculate with a more accurate amount.
Excited? Well, I am!
First is without DRIP:
After 23 years:
- New Principal $226,682.89
- Total Return 181.09%
- Avg Annual Return 7.87%
- New Annual Dividend Income $9107.32
- Dividend Paid out through 23 years $97,788.60
- Yield on Cost 11.24%
Okay! Interesting. Well, the annual dividend is $9,107. It’s certainly something, and it would make life easier in 2040 (when I’m 47 years). Since an average salary in Norway is around $60,000, this annual dividend makes up about 1/5 of my income (I’m expecting to earn a lot more (!) than “average salary,” but that’s another story)
Second is with DRIP
After 23 years
- New principal $472,486.63
- Total return 482.32%
- Avg Annual Return 21.01%
- New Annual Dividend Income $18,899.47
- Dividend Paid out through 23 years $156,584.65
- Yield on Cost 23.33%
Impressive, almost 30% of the average salary without doing anything. Cool, but NOT cool enough. I can’t quit my job and only live by the dividend income. So, what has to change? The way I see it, the easiest thing to change is my monthly or annual savings. Once I get a proper job, I will probably be saving around 30% to 40 % of that income and putting about 20% to 30 % in the stock market. Let’s take a look at the new situation if I invest $10,000 each year:
- New Principal $110,8830.83
- Total Return 318.43%
- Avg Annual Return 13.84%
- New Annual Dividend Income $44,353.23
- Dividend Paid out through 23 years $337,532.33
- Yield on Cost 16.74%
That’s enough to live a sweet life. Especially if I don’t live in Norway where a beer costs $10. Hurray! And there is even better news, I am most likely going to save more than $10,000 each year, which will make this annual dividend even higher, and the waiting time will be reduced even further.