I’ll use Jeff as my example. Let’s say Jeff is 25 years old and currently makes $35,000 a year. He wants to retire at age 65. He decides to put 10% of his income away into a 401(k), earning a 5% match from his employer. If you assume he gets a 9% annual return on his investment over the long haul, that inflation is at 4.5% annually over that period, and that the only raises he gets are cost of living raises to match inflation, he’ll have $2.018 million in his account on his 65th birthday. There’s nothing unrealistic about any of the assumptions here.
First, if a person making $24k needs to save close to $2 Million (say $1.96 M, since thats 80x annual income), a person making $35k needs to save more like $2.8 million, not $2.01.
Second, most 25 year olds are paying off student loans, not saving for retirement.
Third, a full employer match of 50% on the entire 10% contribution to 401(k)? Name me a company that actually offers that. Most companies will cap their contributions to the first 5 or 6% of employee contribution.
Fourth, a 9% annual return means he’d have to beat the historic market average by a small amount.

I’m not saying it’s impossible, but a little less rosy bias in your assumptions can really put a dent in your conclusion that anyone can save a couple million for retirement.

I am totally a numbers guy and I love how you have it all laid out here. It seems a little scary to think that the stock market might stop feeding us interest, but there area always others options and other places to put our money.

Thanks for doing all the math and laying it all out in dummy English for me. You’re the man. Period.

It sounds like you’re cutting it close in terms of what you can afford to contribute, and how much you’ll end up with. There aren’t any magic solutions as far as I know, but you might want to revisit the money you put towards your daughter’s education – college is cheaper than retirement.

On the bright side you should get Social Security? But, that’s not a very bright side.

I guess I was standing behind the door when those large returns were being handed out. I spent many years after the breakup of my first marriage as a single parent with 3 kids and didn’t have money to put towards retirement. I didn’t even start saving for retirement until I was 36 and my investments have returned between 3-6%.

My current hubby and I save about 3% of our income for retirement and another $50/month towards our 5 year old daughter’s future education. We’re allowed to save 18% but I don’t know how we could do it. My Hubby is a commissioned salesperson and our household income is down about $10,000 currently due to the economy.

No matter what I’m able to do I won’t run the “risk” of having “too much” money saved for retirement.

I’ve been reading your blog for a little longer than a year now, and I have quite a few of your articles saved for future reference. This is definitely one of them! What a great explanation of such a convoluted concept as retirement. Thank you! It really makes me feel better to know that $2 million isn’t that scary. I’m maxing-out my 401-k for the simple fact that I don’t know what I want to do in retirement, but when that time comes, I want to be able to do it! You’ve reassured me that I should be just fine :) Thanks again!

We need all the directions we can get, so this website is wonderful for that. But remember, ‘man plans, G-d laughs’.

let’s do the very best we can and pray.

a) Do your best to save 10-20% of your salary into some type of tax advantaged (Roth IRA, trad. IRA, 401K, etc.) retirement account.

b) Keep investing in it for a long time.

Even if you don’t have a perfect system or make the “best” investments leaving you short from your dreams of retirement, you will end up doing better than most folks and you will give yourself more options as you head into retirement.

Not me. A lot of people wont want to work until 65. There is no job security these days. People are transient. They dont work for the same employer for years on end. Employers dont contribute to pensions anymore.

Sorry, but i wont be entrusting my money to the stockmarket. Remember 1935, 87, 2000, 2007 and 2008?

@Shevy #31
I think the assumption is that you have already benefited from large returns, and that your lifetime return is likely to be in the 9% range. But, you’d probably be wise to assume less over the next 10-15 years and bump up your contributions if necessary – if you’re getting to end up with too much, you can scale back or just enjoy a more luxurious retirement.

It’s true that we tend to forget how much both wages/salaries and prices have changed over the past 30 years. Around that time I rented a studio apartment in the city for $175/month and later a small house in the ‘burbs for the same price. My mortgage on the studio condo I sold a year or so ago was a steal at a little over $600/mo plus about $150 in strata fees. A small house would rent for over a grand. (And the median home price in my city is over $700,000.) When gas went metric in Canada, it cost $.289/litre. The last time I bought gas it cost $1.344/litre.

And wages have changed significantly too. My first job out of high school was a unionized position. I made a little over $9,000 that first year (working premium-paying shifts) and my folks were amazed. I made about $24,000 last year working a little over half time for a non-profit.

So, yes, I can see that there will be changes between now and when I retire. But there are a few issues. Not everybody gets a cost of living increase every year. Many people are falling behind. Not everybody has an employer match on a retirement plan. I haven’t had one for more than 10 years. There’s been a lot of downsizing and older employees have a harder time getting hired than 20somethings.

And investments are not returning 9% currently. Talking about holding on over the long term is okay if you’re young, but it’s not going to work for those of us who have only 10 or 15 years left before we need to start accessing that money.

I don’t know what the rest of the corporate world is like, I have worked for the same large Aerospace Company for 11 years and I know my 401k match is 75 cents on the dollar up to 8% ( basically 6% if you are investing 8%). So there ARE good companies out there that give the type of matches that Trent is talking about.

Also, while the Vanguard 500 Index (VFINX) has actually not grown from 1998 to today it has had dividend distributions in that time. So if you include dividends the actual performance of VFINX in the past 10 years is more like 2-3%. On the ohter hand if you bought VFINX in 1988 and reinvested the dividends then it would have given 10% total return. Since inception VFINX has returned 11%.

So yes while the past 10 year period hasn’t been great for many stock indexes, the past 20 or past 30 years have given 10% growth.

Jim

While the economy might not look bright now thats a short term condition. The stock market has weathered events like the great depression and WW2 and still been able to return 9% level returns over long periods of time.

Jim