Is 250k where compounding takes over?

[nun]

Surely the question depends on your income/budget. The percentage growth of any amount with the same AA will be the same, but the ratio of that growth to your annual income will be depend on your starting capital. When your annual growth is comparable to your annual income might be when you see your net worth as "taking off".

[clifp]

For me the magic number was $500K (partly cause i wasn't pay that close attention.)
I think you can also make the case for $250k.

With even a fairly average year of 8% returns 500K generate 40K which is larger than your saving contributions.

For me the big ah ha moment was when I realized that it was much more cost effective for me to spend more time managing my investment, and learning about investing than working late trying to get the top performer review.

A 1% increase in investment return was $5K a lot more than the any raise I was going to get and this was in the late 90s when companies actually gave out real raises.

Now perhaps increasing returns by 1% is not an reasonable goal, but reducing expenses by even .2% is a $1,000 and that is a reasonable goal for most working folks who haven't paid attention to their investment. A $1,000 generally is about the difference between the average raise and the above average raise. Which means taking the time to roll over you old 401K that has been invested in mediocre funds into a self-direct IRA. It means avoiding the extra cost of a lifecycle fund and picking specific bond and stocks funds. It means carefully looking at your choices in your 401K and figuring out which is the lowest cost on a relative basis and then achieving a proper AA with your IRA and taxable investments. All of which takes work, but the compounding effects are great.

[dtbach]

The first 10 years you think nothing much is happening, the next 10 after that you start to notice that your portfolio is starting to grow nicely and is more than you could have thought possible at the start. It's the decades after that, where things really get going and that is when its really exciting (both up and down!)

[scrabbler1]

I remember the first "big" portfolio amount I was tracking closely. It was as I neared the $200k mark in my taxable accounts back in 2000. That year, 2000, was the last calendar year I worked full-time so I added more new money ($26,017) to that portfolio than I did in any other year (and I had paid off the mortgage in 1998 which freed up a lot of new money). The markets were starting to slip that year but by mid-August I finally hit that $200k mark.

[mtheulen]

Couple of opinions:
1. Reaching any particular goal towards fire is a monument in and of itself.The number is more of a goal of your own.That will explain a little of "it's growing faster, more rapidly" etc. That may be 1 million or 100,000.
2.When you ask about a point of "growing faster" for me it was when I realized my wife and I were both investing 26% of our pay however our investments are growing more then our contributions.
Mike

[Andre1969]

I think one thing that might make $250K special is that you can also pronounce it "A quarter of a million dollars". I think $100K is kinda special as well, but "A tenth of a million dollars" just doesn't have the same ring to it.

[Major Tom]

Quote:

Originally Posted by nun Surely the question depends on your income/budget. The percentage growth of any amount with the same AA will be the same, but the ratio of that growth to your annual income will be depend on your starting capital. When your annual growth is comparable to your annual income might be when you see your net worth as "taking off".

Quote:

Originally Posted by Andre1969 I think one thing that might make $250K special is that you can also pronounce it "A quarter of a million dollars". I think $100K is kinda special as well, but "A tenth of a million dollars" just doesn't have the same ring to it.

I think these 2 posts sum it up succinctly. If I tried to add anything, I'd just be waffling and as good as I am at waffling, I'll demur this time

[Animorph]

Quote:

Originally Posted by Andre1969 I think one thing that might make $250K special is that you can also pronounce it "A quarter of a million dollars". I think $100K is kinda special as well, but "A tenth of a million dollars" just doesn't have the same ring to it.

+1. You beat me to it. The first time "million" enters the picture, even if it's just a fraction.

[Totoro]

I thought that 500k was special, but in euro. Half a million has indeed a nice ring to it 4% of that it's also approaching the median net salary of a full-time employee in these parts of the world.

The other element is that I started noticing that saving is starting to have less and less of an impact. Saving 40k when you have 200k is an increase of 20%. Now adding 40k is less than a 7% increase. This is another aspect of the compounding effect starting to dominate.

Doing that calculation is actually slightly demotivating me to keep on working

[UnrealizedPotential]

Quote:

Originally Posted by 2B There's always the "rule of 72." Divide 72 by the expected or hoped for portfolio return. As an example, a 10% return would double your assets in 7.2 years. Going from $100k to $200k in 30 months is either with an excellent return or with additional savings.

I think the reason I was able to double from 100k to 200k in 30 months was because of a number of things: I had already had 101k in investable assets in 2007.Then the market started going down and by the 2009 March low I was at $45,409. So the potential was there for 100k already I just needed the market to go back up.I also continued adding new money to the accounts.Finally since I have a Equity Income fund and a Real Estate Fund they pay quarterly dividends that are continually increasing in value because the number of my shares are constantly rising.I think all these things played a part in me going from 100k to 200k in 30 months.To top it all off as everyone knows the market was up big in 2013,that helped a lot too.

[skyvue]

My own Net worth growth looked like this:

$250,000 - April, 2004 (36 years old)
$500,000 - October, 2006 (2.5 years later)
$750,000 - January, 2011 (4.25 years later) Net worth dove back to $389K in 2008.
$1,000,000 - August, 2012 (1.67 years later)
$1,250,000 - July, 2014 (0.9 years later)
$1,500,000 - July, 2015 (1 year later)

So it took me the first 36 years of my life or 14 years of my adult post-college life to get the first $250K. Lately have been increasing by that amount in a little over a year. Of course the performance of the stock market has a huge impact on all the above.

[Chuckanut]

What really excites many is withdrawing their 4% (or whatever rate they choose) and still seeing more assets at the end of the year than what I started the year with. Not bad.

Back in my teaching days when we learned spread sheets I used to have the students make one showing the results of saving $2000 a year in an IRA. First I would have them guess how much money they would have by the time they reached 60. Most did some simple multiplication and came up with an answer near $80,000. A few knew about interest.

We built the spreadsheet including yearly earnings of 8%. Needless to say they were shocked at how much money they would end up with.

I then asked them to look at each increase and asked what did the SS tell them. A few soon realized that it's the last doubling that really piled on the wealth.

[Andre1969]

Quote:

Originally Posted by Chuckanut Back in my teaching days when we learned spread sheets I used to have the students make one showing the results of saving $2000 a year in an IRA. First I would have them guess how much money they would have by the time they reached 60. Most did some simple multiplication and came up with an answer near $80,000. A few knew about interest. We built the spreadsheet including yearly earnings of 8%. Needless to say they were shocked at how much money they would end up with. I then asked them to look at each increase and asked what did the SS tell them. A few soon realized that it's the last doubling that really piled on the wealth.

I remember one of the first calculations I ever did, that got me turned on to investing. In August of 1991, my Granddad gave me an issue of some money magazine that he had. I remember reading it, and seeing that a mutual fund, Twentieth Century Ultra, had returned 20% in the past year. Back then, I think you only needed $1,000 to open a mutual fund with them, unless you did automatic monthly investing.

Well, I did the math on a calculator, and discovered that if it could return 20% per year, every year, that in 39 years, that $1,000 would break $1 Million!

Now obviously, that fund is not going to consistently return 20% every single year, but it opened my eyes to the idea of compounding. Plus, the fact that $1000 isn't all that much money to start with, so you could always add more. Anyway, it showed me that $1M is indeed an attainable goal.

And, I also understood that when you adjust for inflation, that $1M isn't going to be worth as much. Heck, even though 1991 doesn't seem *that* long ago to me, just accounting for inflation, $1M back then would be like ~$1.7M today. But, I figured, just add more money if you can.

I tried explaining this concept to a friend of mine, as I thought it was truly amazing that $1K could, theoretically, turn into $1M in just 39 years. But, he just couldn't grasp the idea, and wanted to whine about it taking so long. Instant gratification, I guess.

[scrabbler1]

Quote:

Originally Posted by Chuckanut What really excites many is withdrawing their 4% (or whatever rate they choose) and still seeing more assets at the end of the year than what I started the year with. Not bad.

Agreed. I am seeing growth in my portfolio even higher (in nominal dollars) than when I was working!

[38Chevy454]

Lot of good comments here. I agree it is basic math, and the amount is really a person's perception. I think $250K is a significant milestone and it also represents a value where the portfolio is increasing at a rate that is higher than the savings amount you are putting in.

Here is the math: assuming that the person is under 50, you have $17,500 limit for pre-tax 401k/403b type savings. $250,000 x 8% = $20,000 --> which is greater than the $17,500 from paycheck savings.

I understand that my example does not include any company match or additional after tax savings. One can argue about 8% return, but I think this is reasonable value. Certainly for a younger person that should have higher percentage equities, I believe this may even be a conservative rate of return over long term.

[Backpacker]

Quote:

Originally Posted by UnrealizedPotential Another thing I would like to add is from the limited cases available here on the forum to study it takes on average 30 months to go from 100k to 200k.That's how long it took me.It took me forever to reach 100k,much longer than the others.The 2008-2009 bear market slowed me down.Plus I don't make as much as some of the others on this forum.So if I am lucky and roughly in line with the cases I have looked at,I may reach 300k sometime in 2016,and 400k sometime 2018,if I am lucky.From there unless there is a big bear market,it should take less than 2 years for each additional 100k.Now I know I made a few assumptions,but I don't think I am too far off.

Interesting 30 month number... I looked at my history and it took 25 months to go from 150k to 250k. company combined plans at one point so could go back to 100k without a lot of hoop jumping

[HillCountry]

My company stocks went up to $300K and then they quickly crashed. This was 2001. Maybe it was until 2006 when I got over $250 again.

[dallas27]

I think whenever you clear your personal definition of what a "boatload" of money is, thats when the growth seems to take off.


Sent from my iPhone using Early Retirement Forum

[target2019]

Quote:

Originally Posted by UnrealizedPotential I think the reason I was able to double from 100k to 200k in 30 months was because of a number of things: I had already had 101k in investable assets in 2007.Then the market started going down and by the 2009 March low I was at $45,409. So the potential was there for 100k already I just needed the market to go back up.I also continued adding new money to the accounts.Finally since I have a Equity Income fund and a Real Estate Fund they pay quarterly dividends that are continually increasing in value because the number of my shares are constantly rising.I think all these things played a part in me going from 100k to 200k in 30 months.To top it all off as everyone knows the market was up big in 2013,that helped a lot too.

I started my 401k in early 2006. I am also getting close to 250k achievement in that account. My contributions stopped in March. Not my choice...

When I read your first post, I immediately thought of timing. I read now that you have come to similar conclusion. When you begin your investing in a particular account is important, because the sequence of returns and number of years has great impact. Easy to say now, isn't it? How about 2011? For those no longer contributing, it may have been a letdown. OTOH, we were adding at a decent price, and now see the benefit.

Over much longer periods of contributions you'll see average results. For now, let's celebrate. Before long your new money will buying more shares at a discount.

[tmm99]

Quote:

Originally Posted by clifp For me the magic number was $500K (partly cause i wasn't pay that close attention.) I think you can also make the case for $250k. With even a fairly average year of 8% returns 500K generate 40K which is larger than your saving contributions. For me the big ah ha moment was when I realized that it was much more cost effective for me to spend more time managing my investment, and learning about investing than working late trying to get the top performer review. A 1% increase in investment return was $5K a lot more than the any raise I was going to get and this was in the late 90s when companies actually gave out real raises. Now perhaps increasing returns by 1% is not an reasonable goal, but reducing expenses by even .2% is a $1,000 and that is a reasonable goal for most working folks who haven't paid attention to their investment. A $1,000 generally is about the difference between the average raise and the above average raise. Which means taking the time to roll over you old 401K that has been invested in mediocre funds into a self-direct IRA. It means avoiding the extra cost of a lifecycle fund and picking specific bond and stocks funds. It means carefully looking at your choices in your 401K and figuring out which is the lowest cost on a relative basis and then achieving a proper AA with your IRA and taxable investments. All of which takes work, but the compounding effects are great.

I loved reading your post. It's a great way to look at our numbers (and you are so right about the "raise" we get in our portfolio with compounding effect. ) I don't feel so bad now that I got a very low percentage raise this year.