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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.