How $40k can add $1M to your retirement

[Cooked]

It seems to me that I doesn't really add $1m to your retirement it adds $1m to your heir's inheritance. Thank you, but I would rather have an extra year of retirement.

IMHO this is the point to take from this 'article'.

Paul Merriman is a valuable resource because he professes planning. But he is a backtester. Backtesters are not bad, and they have excellent data acquisition and spreadsheets skills. They sometime lack the intangible foresight to understand WHY they are making their spreadsheets.

IMHO this article is not relevant unless your goal is to buy cocaine (or whatever they dig nowadays) for your heirs.

 

[scrinch]

Your original statement gave the impression that the small element of savers in our consumer society are somehow benefiting at the expense of non savers.

I'm saying that today's economy would take a huge hit if every US household decided to put an extra $10k in the bank next year. That would represent a >10% decrease in US personal consumption (over $1 trillion), and would have a hugely recessionary effect. It would make additional capital available for investment, and conceptually that is good, but with a personal consumption market that just contracted 10%, how much of that money would be borrowed and invested any time soon? And with all that new capital available, interest rates (i.e. rates of return for savers) would drop dramatically.

And then there's the demographic issue....if the average retirement age shifted down to 50 from its current 61, that would make 20 million fewer taxpayers (I know we're all taxpayers, I mean those with high incomes paying higher rates) supporting a government that has an additional 20 million non-workers to shepherd. That would have a huge impact to both the US federal budget/deficit and social security.

So the effect of everyone saving like you and I do and retiring at 50, would be a recession, decreased investment returns, a weaker social security system, and a larger federal deficit. Hence my statement that early retirement only works if a few of us do it.

That said, a slow shift to higher average savings rates and earlier retirement ages could result in a higher gross domestic happiness without having catastrophic economic effects. But I do think that there would still be negative economic impacts (at least the way we measure today) like those seen by the high savers in Japan in the 90's and 2000's....a sluggish economy despite readily available capital because of low domestic consumption. I don't know how Japan's gross domestic happiness fared during that time period, however. They may have been very successful on that front.

 

[daylatedollarshort]

Comparing $40K now to $1M 43 years from now is a bit disingenuous in that inflation will seriously erode the purchasing power of $1M in 43 years.

That being said, I always informally advise people to save as much as possible in their initial earning years to take advantage of the compounding effect.

-gauss

Good point. Forty-three years ago, $1 in 1970 had the same buying power as around $6 today. $1M in 43 years might only have the buying power of around $170K today.

Saving early is great. Dying from a heart attack working that extra year to save another $40K if you are already FI might be a stupid thing to do.

 

[daylatedollarshort]

Savings rates in the U.S. used to be higher in years past and the economy wasn't always sluggish during those years -

Personal Savings, 1950-2011 | pgpf.org

 

[Independent]

As many have mentioned, one dollar in 1969 wasn't the same thing as one dollar today.

Here's another way of saying that. In 1969, the average annual wage was about $5,900. That extra $40,000 didn't represent one more year of work. For the average worker, it represented 6.5 more years of work.

Not a small thing.

 

[WestLake]

Saving early is great. Dying from a heart attack working that extra year to save another $40K if you are already FI might be a stupid thing to do.

Thanks for crystallizing this point. I see myself in its reflection.

 

[2B]

As many have mentioned, one dollar in 1969 wasn't the same thing as one dollar today.

Here's another way of saying that. In 1969, the average annual wage was about $5,900. That extra $40,000 didn't represent one more year of work. For the average worker, it represented 6.5 more years of work.

Not a small thing.

I think he had to use something "reasonable" in the minds of most readers. You can easily adjust this article to make it more historically appropriate. Instead of $40,000 use $10,000 which is still a great 1969 income. That would have you starting with a $250,000 portfolio. That amount was significant but possible for a good saver of the period. You could fast forward to the end of the portfolio and divide that by 4 also. You'd leave an estate a little over $1MM to your ungrateful heirs.

 

[Independent]

I think he had to use something "reasonable" in the minds of most readers. You can easily adjust this article to make it more historically appropriate. Instead of $40,000 use $10,000 which is still a great 1969 income. That would have you starting with a $250,000 portfolio. That amount was significant but possible for a good saver of the period. You could fast forward to the end of the portfolio and divide that by 4 also. You'd leave an estate a little over $1MM to your ungrateful heirs.

Yep. There are multiple equivalent ways of saying this. If I'm reading the article right, an extra $40,000 grew to $1,000,000. So an extra $10,000 would grow to $250,000.

A 62 year old staying in the workforce an extra year and saving the wage equivalent of $65,000 back in 1969 would have it grow to $250,000 after 43 years, when he finally died at age 105.