How College Students Can Retire With Over $6 Million

A Single Lump Sum Invested From a Summer of Work Early in Life Can Work Wonders

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With every passing year, millions of high school graduating students around the world move off to college or university in order to make a better life for themselves and the families they someday hope to have. They spend countless hours buried in books, studying for exams, learning necessary skills, and then, after graduation, working full-time jobs plus overtime in an attempt to put food on the table.

What if I told you there was a better way? One of my earliest accounting professors pointed out that a young college student could amass a substantial fortune over a single summer, ensuring that no matter what else happened in his or her life, he or she would be able to retire with enough money to live comfortably. This concept is actually quite simple once you understand the future value of money; how much a single dollar can grow, if left alone. 

Imagine that the summer before you left for college, you worked a few jobs and managed to save up $10,000. You, with incredible foresight and maturity, know that it’s going to get much harder to invest on your own once you are faced with student loan payments, a mortgage, car loans, electric bills, and possibly all the expenses that come with being a parent (diapers, food, clothing, furniture) — you get the idea. You’re a big fan of investors such as Warren Buffett, who at over 80 years old, has amassed more than $66 billion.

Realizing that you don’t need anywhere near that much, you want to create a backup fund of passive income that silently, yet powerfully, works for you without anyone in your life knowing about it. It's your stealth wealth.

To illustrate this concept, here’s what a typical college student can do:

  1. Take the $10,000 of capital and divide it into four piles.
  1. Choose four excellent, blue-chip companies that are likely to earn high rates of return for long periods of time such as Hershey, Coca-Cola, Colgate-Palmolive, Nestle, the oil majors such as ExxonMobil or BP, Johnson & Johnson, or another enterprise with nearly non-assailable competitive advantages, distribution networks, and strong financial statements. 
  2. Open a direct stock purchase plan/dividend reinvestment plan account with each of these firms to buy shares for very low commissions, such as $1 or $2 per trade (some DRIPs, such as the one offered by ExxonMobil, charge nothing at all for regular purchases).
  3. Choose the option to have all dividends reinvested.
  4. Stick the certificates and paperwork in a safe deposit box at a local bank.
  5. Ignore them for the next 46 years other than reading the annual report and ensuring look-through earnings and dividends are rising over time.
  6. At approximately 75 years of age, return to the safe deposit box or crack open the account statements for your DRIP (if you opted for electronic registration for added safety). If history holds true and you managed to earn the historical rate of return on equities, you should have roughly $6,388,918 in ownership built up as a result of the long compounding period. Just as lovely, you should have huge deferred tax liabilities that effectively work to leverage your returns and that can be forgiven if you exploit the stepped-up basis loophole.

    This is surplus wealth that assumes you never added another penny beyond the initial $10,000 and reinvested dividends. It assumes you don't fully fund a Roth IRA. It assumes you don't take advantage of a 401(k). It assumes you don't build equity by owning a home. Basically, you can't help but retire a millionaire, all else equal, because you created the economic equivalent of an oak tree, planting a small acorn and leaving it along for almost half a century.

    If you want to live well during your lifetime, you’re going to have to do what you planned on originally —​ work hard, get a higher education, invest intelligently, and control your expenses. But isn't it comforting to know that no matter what else happens, there is a secret portfolio compounding for you in the background that can provide you with your wants and needs?