# The Retirement Perspective

## Today's Dollars Are Far More Valuable Than Tomorrow's

I asked if, by calculating our monthly expenses, we could multiply that by 200, and if that would be enough to retire. So, if one’s expenses were about \$24,000 a year, if having \$480,000 would be enough. And you said – rightly so – that this figure doesn’t include inflation, and that a safer amount would be close to 2 million! That’s a lot of money, and I must agree with one of the readers who said very, very few people can afford to save that amount during a lifetime.

I strongly disagree with the statement that very, very few people can afford to save that amount during a lifetime. The combined powers of compound interest and inflation will easily push a person’s investment level higher and higher. Many young people today, if they get started, will have millions in the bank when they retire, even if they don’t have a top-paying job.

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.

The problem is that from today’s perspective, \$2 million seems like an enormous amount of money. And it is, in today’s dollars.

## Comparing 1968 to 2008

But let’s roll back the clock forty years and see how things have changed. I’ll use the CPI-A for my historical inflation numbers.

### The CPI-A is a number you can use to compare prices from one year to another

. It takes into account the changing prices of goods and services and comes up with a number that expresses that difference. For example, on January 1, 2006, the CPI-A was at 199.4, while on January 1, 2008, the CPI-A was at 212.516. This means that the goods you could buy for \$199.40 on January 1, 2006 would cost you \$212.52 on January 1, 2008.

Now, let’s say Jeff started saving in June 1968, when the CPI-A was 34.9. Then, he retired in June 2008, when the CPI-A was 219.181. This means that every \$34.90 Jeff earned in 1968 was worth \$219.18 in 2008.

Now, let’s translate those numbers a bit. Let’s say Jeff had \$2 million in 2008 dollars. In 1968 dollars, it’s only \$318,459.

On the flip side, let’s look at investments. On January 2, 1968, the Dow Jones Industrial Average was at 906.84. On December 31, 2007, forty years later, it stood at 13,264.82.

## Comparing 2008 to 2048

Now, let’s say you’ve decided that you need \$24,000 in today’s money as living expenses when you retire in 40 years. Let’s also assume the stock market and the CPI-A change remain the same over the next forty years as they were over the last forty (they won’t be, but we can use them as a yardstick).

First of all, your annual \$24,000 today would have to be \$150,276.19 in 2048. That would actually be \$12,560.52 a month in that timeframe. Using Lois’s “monthly amount times 200″ equation, she’d actually have to have \$2.5 million in the bank then.

### If Lois set her retirement goal at \$480,000, she would be starving in 2048.

But she’s forgetting that compound interest works more strongly in her favor overall. A person today, filing singly, who has \$24,000 in income that they can spend actually has a salary of about \$30,000 before income taxes.

So, let’s say Lois is actually just trying to keep her current standard of living. She’s 25, earns about \$30,000 a year, and never has any interest in climbing the corporate ladder and earning more – she’ll just earn cost-of-living raises for the rest of her career (ideally, this isn’t true, but we’ll make a “worst case” scenario for Lois). Her employer matches 1% for every 2% Lois contributes to her retirement account.

All Lois has to contribute to her 401(k) to reach her goal (using the assumptions above) is 15% of her salary. That’s assuming no performance-based raises ever, no promotions ever, and no job changes ever. If Lois commits herself to building a career and gets a few promotions along the way, her contributions can easily be lower than that.

### \$2.5 million is a completely realistic retirement goal for a young person only earning \$30,000 a year.

They’re helped along by the power of compound interest.

## Is Lois’s “200 Times Monthly” A Good Thumbnail?

It’s only a good thumbnail if you’re starting off with your estimated monthly costs in retirement. Even then, it’s a bit on the risky side, as it will require solid returns on the investments to keep up with the spending.

### There are two big problems with using such easy thumbnails, though.

#### The first one is math based. If you figure everything in today’s dollars, you won’t make ends meet later on.

You’ll have to estimate what you expect to spend then. Doing that in Excel is easy, actually. If you believe that inflation will be at 4.5% from here until retirement, enter something like =2400*1.045^25 where 25 is the number of years you think you’re away from retirement and \$2,400 is the amount you expect you’ll need in today’s dollars each month (for those curious, it’s \$7,213.04).

If you then take that number and multiply it by 200, then you’re starting to get a reasonable retirement figure. I think, actually, that 200 is a bit low, as it assumes a 6% annual return in retirement just to break even. Try using 240 (which assumes a 5% annual return) or 300 (which assumes a 4% annual return) for more safe and realistic thumbnail estimates.

#### The second one is psychological. The numbers you’ll come up with doing this math seem frighteningly large.

Most people then react by ignoring the numbers, arguing that they’re false, or using some other form of psychological crutch to make the number seem more reasonable. But it already is reasonable. It’s important to remember that a 1968 dollar is worth \$6.28 in today’s dollars. If your old man was earning \$10 an hour at the factory in 1968, that’s like earning \$62.80 today. In reverse, a dollar today can only buy what \$0.16 bought in 1968. These trends will be (roughly) the same into the future. A dollar today will likely be worth somewhere between \$5 and \$10 in 2048.

It’s for those two reasons that I don’t find a “target” for retirement to be too useful, especially early on. It can play psychological tricks on you and it can trip you up if you’re not strong on the math.

#### Instead, just stick to a strong savings plan from your first day at work.

Don’t even think about it – just start putting away 10% of your salary either into a 401(k) or a Roth IRA (or some combination thereof). If you do that and work hard at your career, your retirement will be in fine shape.

1. Trent,
I think this is very useful for thsoe who believe that the “dream” of retirement is becoming more and more of a myth.
I am a very large proponent of buying blue chip stocks that raise thier dividends year in and year out. THe bes tpart about these stocks is that they take care of inflation for you. By that I mean that the increases in the divdends year over year far outpace inflation – giving you increased spending power in your retirement.

As a quick example Sunlife Financial (SLF) has raised its dividend on average about 15% each year for the past 15+ years. The dividend increases alone are enough to stongly outpace inflation and provide the needed purchasing power in retirement.

2. Jake says:

The biggest fallacy in your argument is the assumption of a 9% annual return. I know over the very long haul, the stock market has exceeded this figure. However, from 2000 to 2008, the stock market has actually declined, and 8 years is a significant time-horizon. Given the state of the US, blindly investing in the US stock market is unlikely to allow any investor to average a 9% return hereon, in my humble opinion.

With a 5% annual return, Jeff will only have \$703,000 at age 65 and with a 6% annual return, he’ll have \$915,000.

3. Lisa says:

Jake, Nothing says Jeff needs to invest in only US stocks. Ideally, he would diversify – across industries, types of investment and country.

4. Jake says:

Lisa – my point is that even if Jeff diversifies across industries and countries, a 9% interest rate is anything but a given and is likely substantially higher than what is likely.

5. Jake says:

Sorry for the multiple posts, I meant 9% return, not 9% interest rate…

6. shawn says:

I’m a big believer in investing, but the way people blindly assume 9% returns is beginning to be a problem. Warren Buffet among others have warned that due to the large number of baby boomers retiring, growth is likely to be limited in the stock market for the foreseeable future.

7. Doug says:

Assumptions need to be made to project future earnings, but several of Trent’s are overly optimistic, at least in my experience. In my industry, the average raise over the past several years has been 2%. My company has recently been purchased, and we now have a 0% match on our 401K, which is unfortunately a growing national trend. And, as others have noted, 9% average return may be overly optimistic. All of which lends more support to Trent’s final point: get an early start on your retirement saving and continue saving, and you should be fine. Perhaps not \$2M but fine nonetheless.

Trent,
You have a wonderful way of filtering complicated information so that everyone can chew on it. Thanks.

9. Joe says:

This was a great post that really puts inflation adjusted savings goals into perspective. Thanks for bringing these number crunching abstractions down to a layman’s level.

10. guinness416 says:

I just read CD’s interview with an early retiree – she just retired at 44 – and one of the things that comes through to me in the article (and in her blog) is that she planned the hell out of it, running multiple spreadsheets and assumptions and so forth. I think anyone should do the same because I agree that 9pc is problematic, but with the right data you can adjust and react as you go.

11. Amy Sisson says:

I appreciate what you’re saying, but I disagree with one statement: “There’s nothing unrealistic about any of the assumptions here.”

I am 40 years old and have been employed full-time in a variety of jobs since age 22, ranging from secretarial to professional, including seven years at a labor union where my benefits were far better than those of any of my friends.

And I have never once in all this time had matching contributions from an employer to a 401K plan. I’ve had 457 plans to which the employer does not contribute. Granted, the labor union had a defined benefit pension plan. But I’ve always been told that you need the 3-leg approach: social security, employer pension plan, and private savings. If the employer does not match to the private savings, it seriously cuts into what you can do.

Further, my current employer, a community college, does not participate in social security. At all! This is not optional on my part. For my full-time employment here, I am earning zero credit towards eventual social security benefits. We’re told we don’t have to have social security because they have such a wonderful pension system. Oh, and we have that wonderful 457 plan for which they match no contributions.

So just from my experience, your fictitious Jeff has it a lot better than most people do in reality. I would also point out that Jeff is lucky enough to have a full-time job that provides ANY benefits. A lot of people can’t get full-time work because the employers want to avoid the benefits altogether. I’m lucky in that regard, but a lot of people aren’t.

12. Paul says:

Warren Buffett may be pessimistic about stock market gains in the coming baby boom retirement years (it does make sense that many boomers cashing out or converting their equities to bonds), but perhaps we should expect better relative gains in overseas markets?

13. Joe says:

I agree with what has been said here by Jake and Shawn.

In response to Paul, I believe that investors such as Jeff who have such a long time horizon need to invest a substantial amount in foreign markets (approximately 30-40% of their total portfolio), especially the BRIC countries (Brazil, Russia, India and China) because that is where the growth is.

14. I also wanted to add that a target for retirement is of little value if you just don’t have that amount of money to save at the moment. Despite living really carefully, my husband and I can’t manage to contribute a full 10% to his retirement fund right now. Hopefully that’ll change in the future, but for now we’re doing the best we can.

15. Karen says:

My parents just retired with more than 500k in savings and 3k in pensions/social security and I still worry because my father has Alzheimer’s and doesn’t have long term care insurance. They both think they have a lot of money and they don’t (I watch every penny for them).

Learn from my parents-don’t retire without long term care insurance. You just don’t know what’s going to happen and assisted care/nursing is very expensive.

16. I recommend that folks starting an investment plan for retirement start with implementing the concept that economists call “consumption smoothing.” This focuses on consumption and savings rates now and in the future that will maintain a steady standard of living before and after retirement. Unfortunately, people have a tendency to ramp up consumption with increases in pre-retirement income and then panic when they realize that their basic consumption levels can’t possible be sustained in retirement.

17. Aaron says:

When people mention saving 15% of their income, is that Gross or Net? Does that include the amount the company matches on a 401k? Also, would it include a tax-deferred Profit Sharing plan my company contributes to for me?

18. Michael says:

I don’t disagree that with 10% of a modest income, 2.5 million is a reasonable figure for a young person to achieve by the time they are 65. however, 10% is a HUGE amount of money for a person who can barely afford to pay their most basic bills on a modest income. And what if I’m hoping to live in a home one day as opposed to an apartment? It seems that I have to make choices much harder than my parents ever did. am I wrong?

19. justin says:

A great post Trent! However, I agree with the people saying a 9% return is not likely. I guess the best way to sum it up is:

Hope for the best, but plan for the worst

20. Sean says:

All of these helpful hints assume that the economy and money will follow the same path that they have followed. We could very well be headed for a depression as described by economist Gary North, which would mean that inflation and ROI is not going to happen. The best bet is to hold assets. Pay off the house, cars, and anything else possible and hunker down until the Amero or whatever comes around. The dollar is only worth .05 cents compared to the 1913 dollar. This means that the American dollar and all currencies tied to it (pretty much all of them in some way or another) will be gone by 2048.

Assets can be rented, sold, and used when everyone is burning their dollars for heat.

21. Finn says:

9% is a fair assumption, when we talk about retirement (should be 20+ years). In general, I prefer to assume about a 6-7% real return and ignore the inflationary complexities.

I think it’s easier to understand when the savings vs % of current income is graphed. That is, each % of the income you save will earn you a certain % of your current income in the future.

This removes the number biases (like “2 million is so much!”). For example, assuming that we do earn 6.5% for 40 years, and you are saving 10% of your income, your yearly income would be about 70% of your current salary. 15% savings (due to matching), woudl give you about 100% of your income. This assumes you earn about 4% on your retirement fund and aren’t depleting it (you generally should).

The way it was shown to me was like this. For each 1% of my savings that I put away, I can earn;

Years %of my income
y10 0.54%
y20 1.55%
y30 3.45%
y40 7.03%

in the future. It scales up and down easily – to see how saving 50% (!!) of your income would work, multiple each of those by 50. At year 10 I may only earn 27% of my income, but at year 40, I’ll be earning 351%.

This doesn’t include raises because it assumes that your wage will increase at the inflationary rate. If you do move up in your job, however, this can be misleading (in both good and bad ways – it becomes easier to match your old income, but harder to match your new income).

Anyway, having that little chart strongly motivated me to change the way I spend money, so I thought I’d share it. This chart was built at a 6.5% return. You’ll hear that 10-12% is a fair return as well, but it’s best to think of it in real returns because the high-inflationary periods skew the return higher. Anything from 5-8% is reasonable, although I personally feel 6% is about right (80%+ equities, 25 years or longer).

22. almost there says:

I currently am a state worker. They do not match 401K inputs. Had a 1% match in 2003 but that went away. I agree with the power of compound investing. We only have one child so are building a roth IRA for him based on the money he is earning. Next year he will be 21 and we will have put 25k in it for him. Now it is in a VG 500 index fund. Thinking of putting it in VGENX, (15% return since 84) Even if he doesn’t add to it it will be worth quite a bit. He may think I am an AH now but in 40 years I wonder what he will think.

23. Ed says:

I agree that you can’t count on the 9% return Wall Street like to quote. Even if the market does go up that much, most people will buy high and sell low along the way. The average investor has made no where near the returns the overall market has made for this very reason.

24. Laura In Atlanta says:

” . . . he’ll have \$2.018 million in his account on his 65th birthday. ”

My question. Is Jeff single? Looking for someone? Lol, I’ll take him!

Great post though, Trent, thanks . . . I love these scenarios that you work out for everyone. And everyone’s responses. Great stuff!

25. Troy says:

according to the psca.org (profit sharing 401(k) council), the average employer match in a 401(k) ranges betweed 2.5 to 3%. 5% seems a bit optimistic, and is unfortunately out of most peoples control

403(b) (not for profit, schools, hospitals, etc typically have a lower match range, and many have no match at all.

While a company sponsored retirement plan match is good and should be captured, it is limited in both its availability and range and should be compensated for accordingly

26. Sandy says:

It’s pretty difficult, isn’t it, to think about all of this. There has been a series on the middle class in the Akron Beacon Journal recently about how much now lies on the individual to know all of this. In previous generations, a working person got a pension after working 30+ years, plus SS. It’s quite rare for someone to have a pension now. But it was guarenteed income for your retirement. And you really didn’t think about it…you just knew a check was coming every month for the rest of your life. Ditto SS.
Now, cancel that whole pension prospect out, SS will likely be there in some form, but not the etire amount perhaps. So it leaves all of us in the driver’s seat. Which might sound great for some. But for those who may have killer student loan payments (which cannot not be paid), and not so high salaries, and now, as a reader alluded to, they are even taking the match away from our 401(k)s in some companies. It’s quite difficult, I think, to be able to come up with even the numbers that need to be put aside for an average ertirement.
In our household, (and we fall right on the tail of the baby boom years), we have been able to qualify for a small pension, we’ll likely collect our SS money, and since I’ve always been the savings nudge in our home, we have a large chunk in our IRAs/401(k)s. (9% is if you are really lucky…we lost a bunch in 2000, and it’s still not made up yet…don’t “bank” on Wall Street!) The mortgage should be paid off by the time we’re 49, so that concern will be done.
But after reading this article, I think my new motto is “you can never have enough saved”.

27. liv says:

muy interesante.

28. Austin says:

almost there,
If your son does nothing that roth IRA, in 40 years it will be worth 1.3 mil @ a 10% rate of return and a whopping 9.6 mil @ a 15% rate of return (although that’s anywhere near realistic). Looking back I wish my parents would’ve done that for me instead of buying me a car.

29. Red says:

Awesome, awesome article Trent. I’d love to see more of this, I’ve forwarded this to some friends.

Taking basic and pervasive misunderstandings and breaking them down with numbers is doing a great service as well as being downright interesting.

Judging by some of the comments about how the “stock market” got crushed from 2000-2008, maybe an article about how a diversified portfolio would fare over the long term and specifically in tough times is in order.

30. Another Marie says:

Nice set of examples, showing the impact of compound interest and of inflation.

Can you do a related one discussing Social Security? When they send a statement each year projecting SS income in retirement, is that in today’s dollars? What are they assuming about salary? Do they adjust previous years salary for the subsequent inflation? How do we estimate the buying power of that full-retirement money at that time?

I realize that farther away from collecting, the more likely things will have changed by then.

31. Trent says:

“With a 5% annual return, Jeff will only have \$703,000 at age 65 and with a 6% annual return, he’ll have \$915,000.”

Over long periods of time, investments always outpace inflation. 5% return on investments over 40 years would not be paired with 4.5% inflation over 40 years – the economics are simply impossible unless everyone stopped working. Thus, in the case where investment returns were so low, you wouldn’t need the \$2-2.5 million because inflation wouldn’t have been nearly as bad.

32. mk says:

“pay yourself first” and “do it today” are simple message yet hard to reach out everyone. Often many are discouraged when goals are way, way high in future dollar value.

Rule of Thumb is simple formula to do the quick check up. If you figure it’s “too simple”, then move on to more comprehensive method. Idea is to be aware where you are, measure the distance, and motivate to move forward.

As Brent break down for us, Time Value of Money(TVM) works both ways, compound interest works for your savings and investment, but also against inflation and future purchasing power.
As many posts suggest, it always come with assumption that doesn’t agreeable with all.

Many rule of thumb has its value, often people who doesn’t analyze too much do well in life. Simply, they just do it.

33. Debbie M says:

It’s quite likely that I will earn less than \$1 million throughout my entire life, so it is unlikely that I will be able to save \$2 million from that.

That sounds hopeless except for the part about how I am retiring early (age 52) anyway.

I am worried about returns, though. Yes, it makes sense that investments outpace inflation. However, the laws of supply and demand will also come into play. If the boomers are selling their stocks, that reduction in demand will cause prices will go down. If they are loading up on bonds, that will let interest rates go down. (If they are loading up on dividend stocks, dividends may go down but at least the prices will go up!)

On the other hand, in the olden days only rich people could afford to invest in the stock market because of the extremely high trading fees and trading minimums. I always suspected that prices skyrocketed once everyone could do it (though everyone else calls that the tech bubble). So, who knows. I’m definitely a big fan of diversification – stock (growth and value, domestic and foreign), bonds, REITs, having a house paid off, keeping up with work skills just in case, keeping costs down with frugality skills, and anything else I can think of, can actually do, and am not afraid to do.

34. Mark Nelson says:

5% match seems a little high for me. I taught and there was no match. My wife works in corporate and has 1% match.

We do what we can. We have always put 10% away or more.

We just need to teach young kids to start putting 10% away now.

35. Kacie says:

Is this 10 percent rule of thumb based on gross salary or after taxes?

We contribute to a Roth 401k (and will soon open a Roth IRA) because of our tax brackets.

My husband gets a whopping 6 percent match on 100% of his contributions.

Does that mean we can stick with contributing 10% of his pre-tax salary to retirement accounts and call that 16% toward retirement, and leave it at that?

36. Daniel says:

It goes through many of the problems with using the CPI as a proxy for inflation, and it lists the prices of plenty of things (long distance phone calls, TVs, potatoes, chicken to name just a few) that actually declined in price over very long periods. And I’m not talking inflation-adjusted prices, but declines in NOMINAL prices, meaning the inflation-adjusted prices plummeted.

Obviously one has to be mindful of the risk inflation can pose to the purchasing power of your retirement assets, but are we worrying about the inflation bogeyman more than we need to here?

37. JReed says:

Where is the 9% return? It is not in the index 500 Vanguard…My mom put 10k in over 10 yrs ago…we just cashed it out for 10,173 about a month ago. How about if we become different than other blogs and start stating specifics, not overused generalities?
Where, exactly and factually, does one achieve a 9% return after fees without rashly high risk?

38. Jim says:

I don’t think that 9% returns in the stock market is an unreasonable assumption at all. The stock market has consistently given returns of that level when you invest in long time periods.

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

39. Jim says:

JREed, To have a very good likelihood of solid returns in the stock market you really have to hold the asset for 20 years or more.

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

40. Kris says:

While I agree that some funds and markets have declined in the last 8 years, if you have been putting money in each month ( or every 2 weeks like me ) then you are probably ahead when you consider that you were buying up more shares at the low end. Most of the markets hit their bottom in Sep-Oct of 2002 and we have been gaining since ( with a bump here and there but go look at the S&P Chart for the last 8 years to see what I am talking about ). For example, if I invested \$100 a month over the last 8 years in the S&P (\$9600) then today my investment would be worth \$10,960 due to dollar cost averaging. Nothing great but far better than the \$3,000 down the S&P500 chart shows during the same period.

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.

41. Linda says:

Just a thought — we retired in our mid-fifties. There are a few things that have been to our benefit and will also benefit anyone else. Prepare for opportunity. Nothing is always stagnant. If you live frugaly, prepare yourself through knowledge, friendships and savings, and health maintenance to maintain your energy — you will be in a position to know real financial opportunities when they come to you and you will be able to take advantage of them. In retirement you will have everything you need and then some.
Don’t just blindly listen to others for your financial decisions. The risks you take must be in line with the life you want to live. During Jimmy Carter’s presidency CD rates were 15% – but home mortgages were as high as 24%. CD’s were a great investment but real estate was not. Everything cycles. Practice the fundamentals and you greatly increase your chances for success. Set goals. Even if you don’t achieve them, you will still be a lot better off.

42. Shevy says:

I’m glad to see that you devoted a post to this question and it was very interesting to see the way the consumer price index information played out in the example.

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.

43. plonkee says:

I try and work everything out in inflation adjusted amounts. I assume that my contributions to retirement will increase with inflation, and that returns will average 4% above inflation. On this basis, I will be ok in retirement – with roughly the same income that I enjoy now. I hope that I’m doing the calculations right.

@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.

44. claire says:

But who wants to work until 65?

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?

45. getagrip says:

I think the main points are simply:

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.

46. katy says:

this is very discouraging for people in their forties on up, or who are unemployed or who are/have been disabled. (raising hand each time).

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.

47. melissa says:

Hi Trent!

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!

48. Elizabeth says:

Trent, How does Social Security figure into all this? Are you assuming Lois needs to save everything required to meet her current \$30K standard of living? Do you not trust that SS will be there in 40 years?

49. JReed says:

Again…where today…not past but now is there a 9% return? These assumptions are based on a 9% return, so where is it? Give me the name of a fund or a specific investment. Generalities are easy to toss around but we need specifics on how we are going to over ride future inflation.
Thanks for any useful and accurate information.

50. Shevy says:

@plonkee
“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.”

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.

51. plonkee says:

@Shevy:
I probably came across a bit mean. What I meant was that you’re right, you probably can’t assume that going forward you’ll have 9% returns over 10-15 years, and figure out what you’re going to do accordingly.

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.

52. Trent,

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.

53. Jerry says:

@ JReed (and everyone else who is concerned about not earning a 9% return):
Do not let worrying about the details keep you from doing SOMETHING about retirement, emergency savings, college savings, or saving for other things that are important to you. The important point from Trent’s post is that everyone should save some money, whatever you can, regularly. It does not matter if you get a 9% average return, a 12% return, or a 6% return if you’re not saving any money at all. If you are saving money, then what Trent wrote is a good rule of thumb- not perfect for everyone, but a good start. If you put your money into a diverse array of investments (stock index funds, bonds, etc.), where you spread the risk, then you will get a decent return for the times we live in. Good, bad, or ugly, you will have done your best. And you will do much better than the average American, who doesn’t save much these days. (See http://research.stlouisfed.org/publications/review/07/11/Guidolin.pdf and a graph at http://research.stlouisfed.org/fred2/series/PSAVERT) After you have started regularly saving money, and only then, should you start worrying about the details.

54. Jerry says:

@JReed (and everyone else who is concerned about not earning a 9% return):
Do not let worrying about the details keep you from doing SOMETHING about retirement, emergency savings, college savings, or saving for other things that are important to you. The important point from Trent’s post is that everyone should save some money, whatever you can, regularly. It does not matter if you get a 9% average return, a 12% return, or a 6% return if you’re not saving any money at all. If you are saving money, then what Trent wrote is a good rule of thumb- not perfect for everyone, but a good start. If you put your money into a diverse array of investments (stock index funds, bonds, etc.), where you spread the risk, then you will get a decent return for the times we live in. Good, bad, or ugly, you will have done your best. And you will do much better than the average American, who doesn’t save much these days. (See http://research.stlouisfed.org/publications/review/07/11/Guidolin.pdf and a graph at http://research.stlouisfed.org/fred2/series/PSAVERT) After you have started regularly saving money, and only then, should you start worrying about the details.

55. Bruce says:

I have to take issue with your example of how “easy” it is to save for retirement:
I strongly disagree with the statement that very, very few people can afford to save that amount during a lifetime. The combined powers of compound interest and inflation will easily push a person’s investment level higher and higher. Many young people today, if they get started, will have millions in the bank when they retire, even if they don’t have a top-paying job.

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.

56. Tim says:

something is wrong with the math here. 200*\$24k/yr=\$4.8million not \$480k, which is way more than enough if \$2million is a conservative amt.

57. Lola says:

Tim, it’s 200 x what you spend each MONTH (2,000). So I guess it’s 20 x what you spend a year.
I agree with some of the readers: it’s getting harder and harder to find a 9% return, companies do not match the 5%, and it’s overall discouraging for people who are no longer 25 years old, but 40.
Thanks for the post, anyway! (except my name is Lola, not Lois).
http://www.escrevalolaescreva.blogspot.com