Investments

ProDarwin said:

alfadriver said:

What industry starts at 100k in a location where you can actually live on $82k before taxes?

None?  Why is the starting salary relevant?

Because pointing out that someone can be a millionaire in 19 years is part of the narrative.  Which requires a $100k starting salary.

Seems to me that if you want people to actually think this compound savings is realistic, then the scenarios should aso be realistic.  The ones that show these huge differences in money are not really realistic to most people.

I love it when you guys start talking money. It makes my general self loathing even more pointed. Please continue.

alfadriver said:

ProDarwin said:

alfadriver said:

What industry starts at 100k in a location where you can actually live on $82k before taxes?

None?  Why is the starting salary relevant?

Because pointing out that someone can be a millionaire in 19 years is part of the narrative.  Which requires a $100k starting salary.

Seems to me that if you want people to actually think this compound savings is realistic, then the scenarios should aso be realistic.  The ones that show these huge differences in money are not really realistic to most people.

Round numbers are nice. Using realistic numbers, I can get a person to be a millionaire in 27 years. $50k salary, 1.5% raise every year, 15% saved in year one and increased every year by 1% until they're at 37%. All of that is realistic assuming that your COL stays relatively stable (no serious increases in property taxes or rent/mortgage/insurance), and being a millionaire in 27 years is nothing to shake a stick at. Decrease the starting salary to $35k, and it is 31 years. Still nothing special. 

In reply to mtn :

Round numbers are nice, but your example, I'm not so sure about.  Who's cost of living is actually fixed over a 27 year period?  Food and transportation cost will always have inflation to it.  And I find it hard to swallow that anyone would be willing to have their salary increase by almost 50% and not try to live a little better 27 years after you started.  

The only "fixed" expense after that long would be a mortgage that you started at the beginning.

(also, in your example, what's the earning interest rate?  I'm quite sure that's realistic (the sum of the savings is $476k, so to double that will happen) , but to be complete and all....)

If the idea is that you will get a 1.5% salary increase over inflation every year- then your model basically factors out inflation- which is ok.  But that assumption needs to be brought up....

Johnboyjjb said:

 

I always liked this graphic. It presumes a simple 12% annual rate of return instead of actual fluctuations annualized to 12% but it still shows the power of early compound interest.

Wow, I know those numbers can be somewhat generous, but still.  I didn't realize just how much difference  starting a few years early would make

In reply to mtn :

Thinking about it more- can I suggest a change in your model?

Assume a 2.1 % inflation rate (which is the average over the last 27 years).  And then assume a 1.4% raise ever year above that- so the raise is actually 3.5% (starting salary $50k, salary in 2046 would be $122.3k).

Keep the savings rates the same- both in terms of 15% to 37% over the same time period.  

The ending salary of that period looks realistic, the increase in take home pay over the same time also looks realistic (keeps up with inflation).

If people's raises are less than 2.1%, your salary isn't keeping up with inflation....  Which is an important think to know, too- perhaps it's time to change jobs.

It’s an example to illustrate why starting early is good. You can shift  the ages over a couple of years to be slightly more in line with your personal experience. A  9-10% rate of return is realistic. The S&P has averaged that much from inception. Median income in the US is over $50k per year. With that income level in mind, saving 10-15% per year from 30 to 65 into an index fund will pretty much guarantee a decent retirement.  

fiesta54 said:

Johnboyjjb said:

 

I always liked this graphic. It presumes a simple 12% annual rate of return instead of actual fluctuations annualized to 12% but it still shows the power of early compound interest.

Wow, I know those numbers can be somewhat generous, but still.  I didn't realize just how much difference  starting a few years early would make

It's easy to notice the big numbers at the end, but also pay attention to the amount of cash, out of pocket that each person invested. Ben invested 16k to end up there, and Arthur paid 78k out of his pocket to get to that final number. "Time in the market is more important than timing the market" as they say. A higher starting wage (and lower peak earnings) can be more beneficial than the traditional career path where you start out making peanuts, and then peak just before retirement. Put away as much as you can, as early as you can, and let your money work for you instead of you working for your money.

alfadriver said:

In reply to mtn :

Thinking about it more- can I suggest a change in your model?

Assume a 2.1 % inflation rate (which is the average over the last 27 years).  And then assume a 1.4% raise ever year above that- so the raise is actually 3.5% (starting salary $50k, salary in 2046 would be $122.3k).

Keep the savings rates the same- both in terms of 15% to 37% over the same time period.  

The ending salary of that period looks realistic, the increase in take home pay over the same time also looks realistic (keeps up with inflation).

If people's raises are less than 2.1%, your salary isn't keeping up with inflation....  Which is an important think to know, too- perhaps it's time to change jobs.

Hey, you have to keep it simple because there are simply too many variables here that you could account for. 

I used a 7% return, which is what the Total Stock Market index has averaged after inflation for the past 80 something years. If i then use your 1.4% raise (after inflation), and again a 1% savings increase each year, you're still at 31 years to become a millionaire. Using your logic, it should happen sooner--your return is actually better than 7% before inflation, and your salary increases are likely more than the 1.4%. So you'll get to that $1M mark sooner, but it means less.

As for "try to live a little better 27 years after you started" (from your earlier post), well, the 2-4% raises that I've had over my career were nice, but the 50%, 13%, and then 26% raises that I got by changing jobs were required. For the current generation, you should expect to jump ship a few times in your career, otherwise you won't be likely to end up with significant salary increases. 

Fun stuff, I started out of college making $15 an hour. I was able to save about 50% of my salary back then, because I was still on my parents health insurance and had roommates. That 401k from that first job (which had a few promotions and raises in there, but was only 2.5 years with the company) is now worth close to 1x my current salary. Save EARLY. 

In reply to STM317 :

That is honestly what surprised me more.  I always knew the end numbers would be bigger, but I always figured (without doing the math) that by putting in more later it wouldn't take nearly that much to "catch up"

fiesta54 said:

Johnboyjjb said:

 

I always liked this graphic. It presumes a simple 12% annual rate of return instead of actual fluctuations annualized to 12% but it still shows the power of early compound interest.

Wow, I know those numbers can be somewhat generous, but still.  I didn't realize just how much difference  starting a few years early would make

About to send you the spreadsheet you asked for, and I included my own version of this chart. Fun fact? The late starter will NEVER catch up. 

In reply to mtn :

It would take ~$3600 per year to catch up by age 65. 

tester said:

In reply to mtn :

It would take ~$3600 per year to catch up by age 65. 

 

Yeah, or start saving 3 years sooner. It is just insane to be giving up those early years compounding potential.