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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.
While the author’s mathematical projection correctly illustrates the power of compounding, it relies on a “vacuum” model of finance that ignores the structural economic barriers facing the average American. By assuming a consistent 10% savings rate and an optimistic 8% annual return over 40 years, the argument dismisses the reality of stagnant wage growth, rising healthcare costs, and a national personal savings rate that currently sits far below the author’s hypothetical threshold. As commenters like Adam Starry pointed out, a $3,000 monthly income—after mandatory taxes—leaves roughly $2,200 for all living expenses, a margin so thin that a single emergency or a “life blip” would necessitate liquidating those very investments the author relies upon. Ultimately, the author proves that math is easy, but fails to account for the fact that for many, the “discipline” he suggests is a mathematical impossibility when basic survival costs consume nearly 100% of take-home pay.
Difficult requiring great discipline, yes. Impossibility, no. Simply because some people do it. Don’t focus on the $3,000, that’s an illustration.
It’s the concept that is important. Many people earning double the amount claim they can’t save.
An 8% return for the stock market is pretty close to the average over the last 50 years.
Great article R Quinn. You can spreadsheet, or AI it any way you like. The POINT is compounding is your friend. Being an Engineer and taking Engineering Economics allowed me in 1968 to understand I had to save something, so one day we could look to a comfortable retirement. Inflation of course is your enemy, and you must be balanced and reasonable in your estimates. Because of our discipline along with 3 children, we still found a way to save. When IRA’s came, we somehow managed to always save so we could maximize our FREE money put in by the company. Yes, if you relied only on Social Security then, you will have to skimp in your retirement. It turns out our saving discipline has paid off handsomely, and at 76 we changed from saving and earning to spending, and if you are like us living in a CCRC, you will spend more than when you owned a home. At 80, we are fortunate to having a smooth road ahead. You need balance, saving, discipline and some good fortune to make it all work. If you spend, spend and pay 25% on your credit card balance, you will not be able to retire and enjoy it.
People do not understand compounding on investments or debt. If they did, we would not see credit cards with double digit interest rates. They destroy wealth faster than it can be earned.
This is a great reminder that wealth is usually built quietly, not dramatically. Most people do not need a perfect plan — they need a steady habit. Save a percentage, invest it consistently, increase it with raises, and leave it alone long enough for compounding to work. A Roth account can make the ending even better because qualified withdrawals are tax-free, but the real key is getting started and staying consistent.
Retirement security is not built by wishing for more money later. It is built paycheck by paycheck, before lifestyle has a chance to spend it.
The significant effects of returns/compound. Especially over 40 years in our case has allowed us to delay social security claiming and live off our portfolio for eight years with our portfolio value barely changing.
…and great market returns over those 8 years helps :).
Curious if you evaluate “portfolio value barely changing” in nominal or real terms?
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).
Did you say, “BUDGET” 🤯
I couldn’t resist…🤣
So, the average rent for a home in Toledo, (a very low COLA city) is around $1200. That only leaves $1k for everything else. Hard to save even a nickle if that’s the only household income>
That why I illustrate 5% too
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.
You really think people can’t save at $72,000 a year?
No many can’t. It is very clear from household data and it isn’t because they don’t understand compounding or other such concepts.
Not if you have kids.
Then this country and the future of retirement is in serious trouble.
At the same time 76 million Americans attend a Disney resort each year with families spending $5,000 to $9,000 each visit and many visiting multiple times.
I’m pretty sure those families are not only the upper 20%
There is always money to spend, not so much to save I guess.
It is very easy cherry pick particular expenses and demonize them. Also many grandparents are paying for these expenses and do you even have data on how many of these families are going “multiple times?
It’s also easy to rationalize. Disney has an estimate on multiple visits, but that’s why I said “many.”
In any case, the point is not Disney, but non-necessary spending before the financial house is in order and a plan for the future is in place.
I guess you can spend by incurring debt but I doubt a family of 4 earning $72K are spending $5 tp $9 k multiple times a year to go to Disney world.
It’s estimated that 25% charge the cost of the visit. Not necessarily multiple times a year, just multiple visits. Skip one visit and invest that $5,000 and it could make a long term difference.
If the cost is charged, how can it be invested?
I’m pretty sure I didn’t mean the trips that are charged although sooner or later that is money out of pocket that instead could have been saved.
Too bad the down arrows are gone, because I’m sure that what I’m about to write will provoke disagreement. But I don’t think retirement savings should be the number 1 priority for young families. I wouldn’t necessarily do the Disney trip today, because the park has been corrupted by skip the line money, etc. But back in the day, my husband and I did take the kids — drove there and didn’t stay at a Disney property—and funded the trip with credit card debt. I am unapologetic for what we did. I believe that “experiences” shouldn’t be just for retirees: young families should enjoy them too. Kids are only small once. They should have opportunities with their parents to experience things that are out of the ordinary. I don’t think such events have to happen constantly— once in a while is good.
My husband and I worked hard— and ultimately did save for retirement. The Disney trip probably did not constitute a major setback. But I’d have put all our data into a spreadsheet to be sure.
Marilyn,
I’d challenge anyone who would downvote your comment to tell me why. Family vacations are part of the fabric of family life and childhood memories. My first wife and I did the same as you, and the kids, now 50 and 45, still fondly remember those trips. That doesn’t mean vacations get carte blanc on cost, still, they are an important part of growing up.
And uh-oh, you said ‘spreadsheet’.
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.
And a lifetime COLA on the benefit once started.
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……..