The Value of Investment Income: Part I of IV

If I were to offer you the option of owning either:

a)      an investment designed purely to grow in value over the course of 30 years, OR
b)      an investment designed to provide you with regular monthly income over those same 30 years…

What would you choose?

Of course, in order to decide you would need to know all the specifics and variables affecting each investment.  What are the risks of each?  What are the different tax treatments?  For the purpose of this article we’ll set all those aside and assume that, pre-tax, both of these investments are the same in all regards except for:

- one increases in value by $500,000 over the course of 30 years, in today’s dollars.
- the other pays $500,000 in total income over that time span and maintains value, all in today’s dollars.

So, which will it be?

First, why do we care?  It is the same amount of money.  We pose this question because traditional saving and retirement planning often ignores the benefits of receiving extra income from a passive investment, particularly in the early years of wealth accumulation.  Speculation and growth tend to be thought of as tools for the early decades of saving, with income-producing instruments being relegated to the later years of accumulation and distribution (retirement).

What if you received investment income during all those years?  What could you do with an extra $16,666.67 in income each year?  In the next installment we’ll look at a few creative uses for the extra income, but for now we’ll consider the use that probably came to mind first for most readers.  Spend it.  Disclaimer: we don’t advocate this, but let’s take a look.

Here we get to see how these two amounts, the same in today’s dollars, affect buying power differently.  With a given regular rate of inflation, the dollars you spend now will get you more than they will in 30 years.  $16K will hypothetically get you much more now than 30 years in the future, so having it to spend now might not be so bad after all.  You could blow it all by taking three really great vacations.  Eat out frequently, give it to charity, lease a fancy car, do whatever you want.  Collect models and action figures if that’s your thing.

With that last one, I’m getting dangerously close to talking about the topic of Part II, so I’ll stop there.  Stay tuned! (if you wish to be notified of the next installment, you can follow our Facebook page or using the button on our footer).