The breakeven point at 22 years is a milestone to show when the young investor’s retirement savings surpass the projected total payment of $51. At this milestone the ‘investor’ will have $53 and the ‘hoarder’ will have only $23. The ‘hoarder’ must wait 50 years to accumulate $51 and can never match the investor’s savings of $464 reached through the magic of compounded returns.
There is no guarantee that investing $1 per year will generate $464 after 50 years, but history tells us the chances are pretty good. We are assuming that the market generates dividends and capital gains at the average annual rate of 7%. The dividends and capital gains are called returns. Faithful reinvestment of these returns will multiply the accumulated value of our imaginary investment by 7% per year. If $51 generates $464 after 50 years, the compounded returns are $464-$51, or $413. Learn about becoming a young investor by reading Hey Kids.