Sometimes you can’t see further than the back of your own hand until somebody points the way …
… then it just seems so damn obvious that you wonder why all of those other dopes out there are still staring at the backs of their hands!
I was preparing for a radio interview the other day and I happened to pull up an old e-mail (that I mentioned in a previous post) from Fidelity – a fine investment management company – that proudly proclaimed:
Did you know that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?
At the time, I just wrote my little counter-piece and laughed it off because that $76,000 probably won’t even buy you a car in 20 years time!
But in thinking about it – and, this is what I said on air – it’s actually much worse than that …
You go without lunch every day for the next 20 years, and you don’t even get a new car?!
How the hell are you ever going to retire!
Think about it, if $34 a week gets you $76,000 in 20 years … then, you would need to save $340 a week for the next 20 years just to get $760,000 !
Now, even if you could figure a way to save $340 a week (starting right now!) $760,000 a year in 20 years is NOT the same as having $760,000 today …
$760,000 today will get you a reasonably ‘safe’ income of $30,000 a year (indexed for inflation) if you invest the capital wisely, if you don’t suffer any major losses, and if you don’t spend any of it up-front or along the way.
In other words, the equivalent of $30,000 a year has to buy you everything you need and want for the rest of your life!
But …
That’s only if you have the $760,000 today!
If you’re like the rest of the world, to get there you’ll need to put aside that $340 a week for the next 20 years, but that little pup called inflation will be nipping at your heels the whole way …
… and, that $760,000 in 20 years will only be ‘worth’ $350,000 if inflation is just 4%. I can’t even begin to think about what would happen if inflation rises to 5%+, as predicted.
That means that you get to live on $14,000 (in today’s dollars) a year!
So, how much did you expect to save?
By when?
But, wait, Fidelity is offering a 7% annualized return … aren’t you going to invest that money in the stock market (an ultra-low-cost Index Fund, of course) that averages 13% a year?
Sure.
Because the day that YOU invest the market is going to crash, WWIII is going to break out, the sub-prime crisis will just be getting into full swing (again … will they never learn?), or worse.
YOU, my friend, will need to plan for numbers that you can rely on because you only get one shot at this …
… and, the money has to last you for the rest of your life – unless your backup plan is (a) still checking out groceries at the local supermarket when you’re 75, (b) eating dog food, or (c) let me hear it [leave a comment].
And, the number that you can rely on is this: 8%
Because, you can put your money in an ultra-low-cost Index Fund (we’ll forget about minimums and entry/exit fees for now) and rely on the fact that the market has never had a 30 year period where the returns have been less than 8% (that includes periods of war and pestilence and pure market stupidity).
… but, now you have to wait 30 years; because if you only wait 20 years, you can only be sure of getting a 4% annualized return, and that just sucks.
The good news is that if you can wait 30 years so that you can get a ‘guaranteed’ 8% return and you can keep socking that $340 away, week in week out for 30 years, well that’s over $200,000 a year (at a 4% ‘safe’ withdrawal rate)!
Unfortunately, we still have that little pup (a.k.a. inflation) dragging at us via his leash, which means that you can really only comfortably rely on an annual income of $25,000 in today’s dollars.
But …
You will do (much) better if you can start socking away, without fail, $340 a week and indexing that with inflation as well (in 15 years you’ll be putting away $588 a week and in 30 years $1,060 a week).
In fact, if you can maintain that regimen for 30 years, you’ll deserve a medal as well as your annual income of $37,000 in today’s dollars!
$14,000 … $25,000 … or even $37,000 a year in 30 years: is that really what you had in mind?
I suspect not, or you wouldn’t be reading this blog 😉
(c)Live fast die pretty! Wait, I’m not pretty now. Scratch that.
Seriously though, with all the talk about saving for retirement, you never hear about the green eyed monster of inflation.
Q
30 years isn’t that long. I wouldn’t count on an index fund that has been good for 30 years. It is just as likely to drop as it is to rise. And based the on the determination of the US economic conditions with a weak consumer confidence, weak dollar, high national debt, high personal debt, negative savings rate and a housing market crash, you can’t be serious.
It’s time to put your money in commodities and precious metals, hedging against the next several years of increasing inflation as the Fed Reserve plays games with its monetary policy.
@ Curt – I’m not an index fund saver (investor); nor am I a commodities speculator. But for the 99% who are looking for the ‘slow road’ I would back 30 years of Index Funds v 30 years of commodities (incl. gold, etc.) any day … including TODAY 🙂
Using “30” years is a a bit arbitrary. In some contexts it is too short – if I retire in my mid forties I might need to plan for 50 years (and my wife has a higher probability of needing to do so that I do). The bottom line on inflation is that given enough time, it will bite you and the only real protection is to keep the bulk of your money in investments which are likely to show returns which are higher than the rate of inflation.
As an aside, most supposedly inflation indexed products will loose real value over time due to a combination of understated inflation and taxation.
@ Trainee – I used 30 years, because that’s the shortest planning horizon that ‘guarantees’ a minimum 8% return (on a fund that mirrors the S&P 500) IF 75 years of history is anything to go by.
Also, TIPS inside a ROTH IRA, or selected inflation-protected MUNI’s outside, solve the tax issue … I agree that the under-reporting of inflation is an issue in ALL retirement planning.