I just received a hilarious e-mail in my in-box from Fidelity. It said: Did you know that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?*
*This hypothetical example assumes a participant earns $30,000 every year and defers 6% of his/her weekly pay ($34/week) at the beginning of every week for 20 years to a tax-deferred retirement account earning a 7% annual rate of return compounded weekly.”
Why is that funny? Well, in 20 years, $76,000 won’t even buy you a car!
That’s the problem with these “save your way to $1,000,000” advertisements (and, books) …
… while you certainly should put away at least 10% of your gross income (hopefully, it eventually comes to a lot more than $34 a week!), and
… while you may (and should try to at least) make it all the way to $1,000,000 in the bank (or CD’s or 401K) by the time you retire in 30 or 40 years:
(a) You will probably be too old and tired to enjoy it … hell, I’ve waited to 49 to retire and I already feel too old .. and
(b) $1,000,000 will buy you diddly squat because of a little thing called inflation.
Inflation is the thing that causes a sixteen ounce loaf of bread to cost $0.19 in 1950 and $2.10 in 2008!
You don’t have to look too far to see this inflation-effect taken to it’s extreme: in Zimbabwe raging inflation is the thing that means even Z$750,000 isn’t enough to buy that $2 loaf of bread!
What does this mean if inflation averages, say, just 3%?
Let’s say that you are 25 years old today, aiming to save $1,000,000 by the time you retire … by the time you reach 65 and cash in your $1,000,000 ‘retirement check’ that would be the same as your grandfather retiring today on just $315,000 savings!
Does that sound like a lot? Let’s see …
$315,000 would give your grandfather just $15,000 a year to live on (allowing for small yearly ‘pay increases’ after 65, so that he could also keep up with inflation).
Would you want to retire on just $15,000 a year?
No?
Then the only choice that you have left is to try and get rich … quickly, slowly, any legal, safe and ethical way that you can …
Stick with me, and I’ll show you how! Really.
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Well, I am 25 (24, actually) and I’m scared of inflation. Terrified of it. I want to retire at a minimum of $30k a year, in whatever that would cost me in 50 years. Help me figure out how to do this!
Hi Ms Every Cent… First the good news … you are only (!) 24 and already thinking about retirement … that’s really good, because if you really are hell-bent on saving your way to wealth (a.ka. getting rich slowly) then TIME IS ON YOUR SIDE!
Now the bad news … even if you saved $2,500,000 in 50 years that would ONLY have a 50/50 chance of lasting as long as you do. In fact, you would need to save $3.5 MILLION if you want to have at least a 90% chance of your money lasting.
Here’s why:
If inflation averages only 3% for the next 50 years (are you really going to work until 74?) then the equivalent of $30,000 a year now, will be nearly $128,000 then!
And, that $2.10 loaf of bread now, will cost you nearly $9 then – that $20,000 car now will cost you $85,000 then.
To get to ‘just’ $2,500,000 by the time you retire, and IF you are earning $30,000 a year RIGHT NOW and if you START SAVING RIGHT NOW, you will need to save 9.8% of your salary every month … if you wait just one year to start saving, you will need to save nearly 11% every month … so, START NOW.
Question: what do you do if you want to retire earlier, say, at 54 years old?
Answer: you will need to start saving 43% of your current salary! If you wait even a year to start putting this much aside, the amount you will need to save jumps up to 47% of your current salary.
NOW you know why I say people can’t SAVE their way to retirement, let alone to becoming RICH …
… what to do? Keep reading this blog!
PS one of the calculators that I used for this comment was: http://finance.yahoo.com/calculator/retirement/ret-02 … I had to use a spreadsheet and a T Rowe Price calculator as well.
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Adrian,
Good point about inflation. On the other hand, let’s not dismiss too quickly the good old save-your-way-to-retirement advice. Saving $15k/year for 40 years yields an expected $2.5M in today’s dollars (for what it’s worth: $10+M in retirement dollars), assuming your investments go up 5-6% per year after inflation.
@ Concojones – Good points, but there are four REALLY BIG assumptions, here:
1. You’re happy to work for 40 years,
2. You can save $15k per year, EVERY year,
3. You can average 8% to 10% return AND add $15k per year (e.g. real-estate is probably OUT),
4. You MUST be disciplined enough to stick to this simple strategy for the entire 40 years WITHOUT WAVERING.
Not impossible, just very unlikely, hence much more risky than it may seem ‘on paper’ 🙂
Adrian,
Sure, that’s all very true. So we agree it can be done …let’s call it FMF-style 🙂
BTW, I’m new to your blog and what appeals to me is your perspective (of a business man), e.g. leveraged real estate, cashflows, that kind of thing. Interesting!
Now that we’re at it, there’s something I’m highly curious about: is it worth it? I mean, in hindsight, do you think you really needed 5 or 7 million to live your life’s purpose? My thinking is this: even now that you’re retired, you still need to have activities you like (say, coaching blog readers ;-). The thing is, coaching blog readers doesn’t require millions in the bank, right?
So what are my plans? We already said that interesting activities are a must. While I would enjoy surfing in Byron Bay, I think it would bore me pretty soon. Therefore, I’m trying to develop a career I (really) love, ideally start my own business (and grow it, just for the challenge/fun of it).
All while setting aside money … to reach financial independence, yes, but not for its own sake, rather so that I know that I can work because I like to, not because I have to.
So yeah I’m a twenty-something guy who hasn’t come to the conclusion (yet?) that I need $x million to live my life’s purpose. I’ve thought about financial independence on occasion, but more as a way out, when my job disappointed me. But it’s not a real solution for that problem, because once you’re independently wealthy you’ve got to find an interesting activity anyway.
If you would like to comment on this, please go ahead. I’d be interested to hear your perspective!
“The thing is, coaching blog readers doesn’t require millions in the bank, right?”
It does if you want to teach others How To Make $7 Million In 7 Years … at least, with any sort of credibility!
Actually, in 1998 I discovered my Life’s Purpose: “To be constantly traveling: mentally, physically, and spiritually”.
In thinking about that, I decided that I needed:
1. Time – no work, if I’m travelling all the time (mentally/physically/spiritually), and
2. Money – Unfortunately, I decided that I couldn’t ‘travel’ Coach 😛
Hence, I needed $5m5y, which became $7m7y (I made more than expected).
Thanks for the quick reply. I think I get it: the desire to experience new things rather than the daily grind, right? Yeah I think I can definitely relate to that. 😀
Would you mind to share something about other mental/physical/spiritual travel activites you may be doing these days, besides blogging/coaching? Or refer me to a post on that topic …I’ve read a lot of your blog but nowhere near everything! Thanks!
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