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

[SumDay]

This MarketWatch article just popped up in my Facebook newsfeed

How $40k can add $1 million to retirement - MarketWatch

I'm still learning, and this is an easily understandable example for someone with my limited math comprehension. And DH is totally uninterested in this "money stuff" but it's a great article to show someone like him who couldn't fathom how $40k could possibly make a difference.

I'm sure the long tenured members around here could have told me all this, but I thought it might be helpful to some that a newish, like I am. So, I'm posting it here so I can come back & find it someday.

 

[ERhoosier]

Another re-statement of the power of long-term compounding, and reminder to start saving EARLY.
7.8% ave returns over 43 yrs yields 25X return --minus taxes & inflation, of course .

 

[pb4uski]

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.

 

[dunkelblau]

If I were aiming to leave it to heirs, I'd try to get it into their tax-free accounts as quickly as possible to avoid future estate taxes. The point of the math is well taken-- think about how much the typical student loan balance hurts a fresh graduate's retirement? So if I had that 40K and an heir who was about to enter college I think I'd try an interest-free family student loan whose principal gets forgiven dollar for dollar with their retirement plan contributions (kid can choose between paying me or paying his/her future self).

 

[2B]

All he did was start his $40,000 annual withdrawals with $1,040,000. He had a 3.85% withdrawal rate instead of 4% in the "before" table. A small change in the beginning can make a big difference after many decades.

 

[daylatedollarshort]

I thought the article was a variation of the one more year syndrome. Think of all the money you could save if you never retired!

 

[2B]

I thought the article was a variation of the one more year syndrome. Think of all the money you could save if you never retired!

I resemble that remark.

 

[ERD50]

All he did was start his $40,000 annual withdrawals with $1,040,000. He had a 3.85% withdrawal rate instead of 4% in the "before" table. A small change in the beginning can make a big difference after many decades.

I thought the article was a variation of the one more year syndrome. Think of all the money you could save if you never retired!

Yep, that's all it is, dressed up with a dramatic headline. He apparently used a year that would have your portfolio grow at that WR - this made the effect even more dramatic.

-ERD50

 

[karluk]

I agree that the article can be interpreted as supporting OMY syndrome, but to tell the truth I really like the fact that it attempts to quantify what people are giving up by retiring early. It's not a trivial amount of money, so it's up to each prospective retiree to evaluate the trade-off between OMY and the potential risk of needing to live at a drastically reduced standard of living in retirement. Once one has achieved a sufficient cushion to achieve a 100% success rate, then OMY is just an excuse to set aside more money that one doesn't really need. But without that 100% success rate, OMY can be a sensible reminder that success is oh so close, so why risk failure by retiring prematurely?

 

[daylatedollarshort]

I feel the investment industry has a self interested agenda to keep people working longer so they can hang on to customers money and collect their fees for as long as possible.

I rarely see them publishing articles on how cutting $5K from your annual expenses can mean needing $150K less in savings, allowing you to retire several years sooner.

 

[karluk]

I rarely see them publishing articles on how cutting $5K from your annual expenses can mean needing $150K less in savings, allowing you to retire several years sooner.

Ah, but $5k is a lot of money. For me it's the difference between being able to vacation in Europe every summer and staying home. It's not up to the financial services industry to tell me that I don't really need that European vacation during retirement and therefore should retire a few years early. As long as I can afford it, I don't need to fly first class. Someone with higher standards might insist on going first class all the way and really need that OMY to afford it. To each his own.

 

[daylatedollarshort]

Ah, but $5k is a lot of money. For me it's the difference between being able to vacation in Europe every summer and staying home. It's not up to the financial services industry to tell me that I don't really need that European vacation during retirement and therefore should retire a few years early. As long as I can afford it, I don't need to fly first class. Someone with higher standards might insist on going first class all the way and really need that OMY to afford it. To each his own.

it is the same logic in reverse, save more and retire later, or cut expenses and retire earlier. My point is that the investment industry tends to only only focus on the retire late articles because it is their self interest, not necessarily yours.

 

[modhatter]

I hate these brokerage firms using numbers from past where bonds were yielding decent returns (yield & appreciation) and company dividends were much stronger to show a retiree probable numbers during their withdrawal phase. That time period could enable a retiree to take money from their bonds and dividends to a much greater extent than it would be for retirees today.

Now that might change in the future, but that future will not help out current retirees. Such a draw of 4% today for that kind of time frame would be suicidal today for current new retirees, especially early retirees. So is this a new article or an old article? If it's new, Shame on them.

Which brings up a pet peeve I have. I hate pulling up articles on the web, only to "not find" the date it was written. When it comes to financial stuff, dates are very important.

 

[SumDay]

modhatter, here's the date I'm seeing:

Aug. 21, 2013, 6:15 a.m. EDT

And, daylatedollarshort:

I rarely see them publishing articles on how cutting $5K from your annual expenses can mean needing $150K less in savings, allowing you to retire several years sooner.

I think that's because telling most of the general public to <gasp> reduce spending would be considered blasphemy. Our society wants what we want when we want it. JMHO, of course, based on spending habits of friends who are starting to make us cringe way too often.... It gets more and more painful to bite your tongue.

 

[scrinch]

Heck, it's not just the investment industry encouraging you to work and spend more. The entire country's economy, the world economy, is based on economic growth....i.e spending more every year. Saving the $5000/yr or $40,000/yr for an earlier retirement only works if it's just a few of us who do it. If everyone does it, then the economy shrinks, jobs disappear, recession hits, deficits soar.

It is a little sobering to think about it that way. We need everyone else to spend freely to keep the economy growing so that we can save and enjoy an early escape from the working world. It feels a little selfish when I say it that way.

 

[truenorth418]

I hate pulling up articles on the web, only to "not find" the date it was written. When it comes to financial stuff, dates are very important.

+1

 

[AndrewJackson]

Heck, it's not just the investment industry encouraging you to work and spend more. The entire country's economy, the world economy, is based on economic growth....i.e spending more every year. Saving the $5000/yr or $40,000/yr for an earlier retirement only works if it's just a few of us who do it. If everyone does it, then the economy shrinks, jobs disappear, recession hits, deficits soar.

It is a little sobering to think about it that way. We need everyone else to spend freely to keep the economy growing so that we can save and enjoy an early escape from the working world. It feels a little selfish when I say it that way.

So you actually believe that the fat dumb consumer at a box store is what improves economy and people's standard of living? I think you will actually see the data and economic theory point out that higher rate of savings are directly correlated with higher levels of economic growth.

 

[daylatedollarshort]

Heck, it's not just the investment industry encouraging you to work and spend more. The entire country's economy, the world economy, is based on economic growth....i.e spending more every year. Saving the $5000/yr or $40,000/yr for an earlier retirement only works if it's just a few of us who do it. If everyone does it, then the economy shrinks, jobs disappear, recession hits, deficits soar.

It is a little sobering to think about it that way. We need everyone else to spend freely to keep the economy growing so that we can save and enjoy an early escape from the working world. It feels a little selfish when I say it that way.

The current world economy is based on growth. Maybe we should start measuring GNH, Gross National Happiness, instead like Bhutan -

Record | Columbia News

 

[scrinch]

So you actually believe that the fat dumb consumer at a box store is what improves economy and people's standard of living?

I'm saying that to pull the economy out of a recession, economists recommend getting more cash into the hands of consumers, not cutting back consumer spending and increasing savings. I'm saying that when the Fed wants to get the economy moving, they decrease interest rates to encourage investing and spending.

 

[scrinch]

The current world economy is based on growth. Maybe we should start measuring GNH, Gross National Happiness, instead like Bhutan -

A great idea....after all Thos. Jefferson wrote something about "the pursuit of happineff" rather than "the pursuit of the almighty dollar" in the Declaration of Independence. Maybe that's what we should be measuring our success against, general happiness rather than economic prosperity alone. But alas...money is so much easier to count.

 

[gauss]

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

 

[danwhite77]

I hate these brokerage firms using numbers from past where bonds were yielding decent returns (yield & appreciation) and company dividends were much stronger to show a retiree probable numbers during their withdrawal phase. That time period could enable a retiree to take money from their bonds and dividends to a much greater extent than it would be for retirees today.

Now that might change in the future, but that future will not help out current retirees. Such a draw of 4% today for that kind of time frame would be suicidal today for current new retirees, especially early retirees. So is this a new article or an old article? If it's new, Shame on them.

Which brings up a pet peeve I have. I hate pulling up articles on the web, only to "not find" the date it was written. When it comes to financial stuff, dates are very important.

This is a fantastic point. Today there simply is no yield (other than, perhaps, buying a rental property and working as a landlord which isn't really yield, it's a job). So you have no choice but to invade principal. Hopefully this changes sometime soon, but for the last four years or so a 4% withdrawal means that you're depleting the nest egg by 4% and there is no yield to fund the depletion.

 

[daylatedollarshort]

Heck, it's not just the investment industry encouraging you to work and spend more. The entire country's economy, the world economy, is based on economic growth....i.e spending more every year. Saving the $5000/yr or $40,000/yr for an earlier retirement only works if it's just a few of us who do it. If everyone does it, then the economy shrinks, jobs disappear, recession hits, deficits soar.

It is a little sobering to think about it that way. We need everyone else to spend freely to keep the economy growing so that we can save and enjoy an early escape from the working world. It feels a little selfish when I say it that way.

I am not buying it that big box stores, low savings rates and oversize house are the only way to keep an economy robust.

According to an article in Scientific American -

"Americans account for only five percent of the world’s population but create half of the globe’s solid waste."

Use It and Lose It: The Outsize Effect of U.S. Consumption on the Environment: Scientific American

 

[scrinch]

I am not buying it that big box stores, low savings rates and oversize house are the only way to keep an economy robust.

Me neither. Who said that it was the only way? I just said that that's the way it is today. Let's change it!

 

[AndrewJackson]

Me neither. Who said that it was the only way? I just said that that's the way it is today. Let's change it!

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. All of the improvements we have today are because someone decided to make an investment for tomorrow. The more savers the merrier.