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I posed this question to an AI program (because I don’t know how to use a spreadsheet).
“If my income is $3,000 per month, I save 10%, I expect to earn 8% per year on invested money and my income will increase by 2.5% per year (basically inflation). How much will I have in 40 years?”
Here’s the answer.
You’d have about $1.29 million after 40 years, assuming you invest the savings monthly, earn 8% per year compounded monthly, and your income — and therefore your 10% savings amount — rises 2.5% each year. Assuming all tax deferred.
About $914,000 of the final $1.29 million is growth from returns on your investments
If you save only 5% of income instead of 10%, you’d have about $645,600 after 40 years
About $457,000 of the final $645,600 is growth from returns on your investments.
Compounding is pretty powerful stuff. Imagine if this was all in a Roth account. Saving a portion pre-tax will help with take-home pay.
Add a few extra dollars along the way; tax refund, a bonus, a gift, whatever and things look better.
In my opinion, for most people this is very doable and once in place will continue virtually unnoticed. Lifestyle with a bit of discipline will be based on net income. Add Social Security to this nest egg and retirement should be comfortable.
We could play with the numbers all we like, but the approach is sound for most people even recognizing life’s blips along the way.
You have helpfully reminded us in other posts that Social Security (SSA) provides much more beyond pension benefits. And, appropriately in my opinion, those benefits paid are skewed in favor of the lower earning people relative to payroll taxes paid. Which means claims that we’d all be “better off” by investing in stocks rather than paying payroll taxes is like comparing apples to oranges.
My approach, like millions of others, was to appreciate that the projected future SSA benefits were modest but they did provide a floor, so to speak. To continue our standard of living, we would need to enhance the expected payout amount, so we invested. Emphasis on the word “Need”. As in needs and wants. And we added disability and term life insurance for added protection during the critical years.
Anyone working today can view their projected future SSA benefits for retirement, as well as benefits for premature death and disability, should they be needed. And with the impending crisis in SSA funding, and uncertainty in future benefits, such an analysis seems especially necessary.
Some people are natural savers, and I admire them. I’m not. But I became a saver when I considered our financial future, and the consequences if we failed to act. Need versus wants. The media suggests there are many who are not saving enough for retirement today. I don’t think I’m smarter about money than most of them. I wonder if instead many are reluctant to cut their current spending, “retirement seems so far off” and they don’t look because they don’t really want to know.
Your post didn’t answer the question posed in the title. “Is saving really that hard” You didn’t ask how easy it would be for a person who makes $3000 a month to save $300 per month. For that you would need a budget.
Just some quick calculations:
Monthly income: $3000
FICA Tax (7.65% = $ 229.50)
State and Local Tax (4.57% – typical for PA = $137.10)
Save 10% of 3000 = 300
Federal Tax ~ $140 (Assumes savings is before tax, and single filer with Std deduction)
That leaves ~ $2200 a month to live off of. Rent, transportation, health insurance, food, auto insurance if a car owner, various utility bills……
Sounds like someone living on the edge in most places – one financial emergency away from problems (emergency room visit, lost job, expensive car repair).
Not only someone on the edge but someone who doesn’t exist because it can’t be done. Even at double the income with a family, can’t be done.
Out of curiosity, are these figures real or nominal?
They are as real as any long term estimates with assumptions can be. If one assumption is off over 40 years they are wrong. Just like a budget or planning spreadsheet 🤑
Do you know what the weird thing is? I’m just about to post a piece around compounding. But mine’s from the past until now, rather than from now into the future! 😁
Nominal returns are not adjusted for inflation. Real returns are, and as such are much more useful for planning purposes.
A year or so ago, I analyzed whether or not I could have done better than Social Security if I had been able to invest my payroll taxes in the S&P. The simple answer was yes, but the real (and more accurate) answer was much more complicated. What if I had become disabled, what if I died leaving behind a wife and a housefull of kids, what about spousal and survivor benefits? Finally, the question most pertinent to both my and your post is if it’s realistic to expect (most) people to follow through with saving over a period of 40 years. The math is simple and correct, the reality, sadly, is not.
Ah there is the rub. Everything works perfectly and you may well accumulate in assets an amount to generate higher income than SS provides. But working exactly as planned for forty years or so is highly unlikely.
Plus, the mistake people make is thinking of SS as retirement income for the worker. It’s not that, it is insurance for all the things you mention and more. There are children disabled from birth ex-spouses concurrently with current spouses and the big one, spousal benefits for non working spouses.
I agree with everything both you and Dan are saying but the “insurance” analogy only carries so far. For those who make it through life without any of the curve-balls life can throw at a person where a Social Security “Insurance Claim” is warranted; there should be no S.S. payments at all. The program was designed in a different time when the country was reeling from the depression and retirement savings were dubious at best.
The forward looking mindset needs to shift to “I paid into it but I hope I never need it”. No different than one would hope to not be in a serious car wreck or a tornado blows down one’s home when paying a true insurance premium.
Maybe this approach would also begin to shift some peoples’ ill informed mindset and resultant life choices driven by the notion that Social Security will be or should be their sole retirement fund.
It needs to truly become the “safety net” and not part of the tightrope itself that we all walk in life.
The impending deployment of retirement accounts able to be funded soon after birth is a good start and another arrow in the quiver to right size this S.S. albatross that hangs around the neck of the country. I hope some default funding from the government becomes the norm along with auto-investment in an equity index. It will be a far better investment than doling out S.S. funds by default to those who do not need the “insurance” years from now.
One can dream……..