Let’s imagine you’ve got $100,000 in your mattress, and you’re as risk-averse as Aunt Bee who wants only a risk-free investment. If your timeline is next Tuesday, you will forever be in your mattress. However, if you’re in it for the long haul, let’s say a solid 10 years, that’s different.
Step #1 of the risk-free investment strategy: Secure that ‘I’m-serious-about-this’ vibe by investing $61,391 in a 10-year Treasury bond. Currently, the Treasury is yielding about 4.6%, so I’m going to use 5% in this example to keep things simple. Your financial calculator will do the math dance and reveal that $61,391 invested at 5% will mature at $100,000 in a decade. Voila! You’re getting your money back with interest – it’s like magic, but with more numbers.
Step 2: Now, with the remaining $38,609 still burning a hole in your pocket, let’s dip our toes into the stock market waters. No one knows what the market will do, but let’s throw caution to the wind and assume an 8% average annual return for the next 10 years. If pigs start flying, and that actually happens, you could end up with a sweet $83,353 from the stock portion. Ah ha! Your grand total return is $183,353, and the best part? No risk of losing sleep over your investments.
Okay. Reality check: Crunching the numbers reveals that your received a total return of 6.25% over the decade. But wait, maybe it’s not such a risk-free investment strategy after all. Taxes and inflation show up to the party, and suddenly your after-tax return, assuming 3% inflation and a 24% tax bracket, is doing a limbo dance at a mere 1.75%. And that’s if you’re in a state with no state income tax!
What was it we learned about a free lunch? Turns out, it might not be free, but at least it’s entertaining. If you’re guessing there’s a better way to reach your goals, you’re right. And, of course, it begins with a plan.
