Finance

Sorry, Thanos: Compound Interest is the Most Powerful Force in the Universe

In or out of the Avengers universe, graduation is a great time to engage this superpower.

Don Milne May 22, 2018

From the start of the wildly successful movie “Avengers: Infinity War,” the villain Thanos makes known his plan to destroy half of all life in the universe. Without revealing any spoilers as to whether Thanos succeeds or not, one thing is clear: Thanos may be a supervillain, but he is not super bright.

Thanos may have control of a lot of powers, but he doesn’t understand the power of compound interest. Albert Einstein is quoted as saying, “Compound interest is the most powerful force in the universe.”

Sorry, Thanos, even with your infinity stones gauntlet, compound interest has you beat. You’re second rate.

Here is the proof:

Thanos is concerned that overpopulation makes resources too scarce. His solution is to eliminate half of all life in the universe to double the resources available for everyone who is left. This is a bad solution.

Let’s say world population dropped from 7.3 billion to 3.65 billion at the snap of Thanos’s fingers. Guess what? Based on history, we’ll be right back at 7.3 billion in 48 years. This is compound growth in action. Maybe Thanos should have made a goal to use his powers to double the resources in the universe instead of destroying half the lives.

You could become a millionaire – even if your dad isn’t Tony Stark.

In or out of the Avengers universe, graduation is a great time to engage the superpower of compound interest. Let’s start with the example of a recent college grad who has been getting by with student jobs.

While a student, 24-year-old Mantis had a part time job caring for an elderly recluse. It paid around $20,000 a year.  Now she has graduated with a degree in telepathy and gets a job making $40,000 a year.

It would be tempting to just start living on the full $40,000, but she decides she is going to invest 10% each year in a Roth IRA mutual fund. Let’s make some conservative assumptions: She’ll get a 2% raise each year and she’ll earn an average 8% each year from her IRA.

After one year, 96% of her retirement account balance is money she put in. Earnings account for only 4%. Ten years later her contributions are 65% of her balance, but 35% is due to earnings and growth on earnings.

Twenty years later only 43% of her balance is from her contributions, the rest is from earnings growth. Jump to 40 years and those contributions only account for 19% of the balance with earnings now 81%. In fact, by age 70 the account would have over $2.5 million, tax free! Mantis is a millionaire thanks to the power of compound interest.

Remember: Time is on your side.

The same superpower works for high school grads who never go to college. Here is an example: 18-year-old Peter Parker finishes high school and gets a job paying $25,000 a year. He, too, decides to invest 10% of his earnings in a Roth IRA mutual fund each year. He’s too busy with his alter-ego Spider-man activities to ever do too well at work, so he never gets more than a 2% raise.

Assuming the same 8% investment growth, he ends up with almost $2.4 million, tax free. He invested less over time, but because he started five years earlier, he ends up with almost as much as Mantis.

Avengers are fun but make-believe. Compound interest is the real deal. Because it grows slowly to begin with, it is best to embrace this superpower when you are young. Graduation is the perfect time to start.

Mutual fund returns are not guaranteed and can lose money. We can’t predict the future, but history has shown that a diversified portfolio of mutual funds held for 10, 20, or more years can regularly make 8% or even 10% or more on average over the years.

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