So at a 10% return, which is the average return of the S&P 500 over the last 20 years, (I know this is on the high end of expected returns, but it is the average of the last 20 years) my investment should double about every seven years or so. I am currently 40 years old with about a quarter million in retirement/investments so the math is as follows.
40=250k
47=500k
54=1 million
61=2 million
68=4 million
I grew up poor so $4 million is an insanely high amount of money to me, how is it this easy? Why doesn’t everyone have multi millions by retirement? I feel like I’m doing the math correctly, but it just doesn’t seem right. And this doesn’t even count future contributions. It’s just my current with nothing added
Someone help me out on my math with the rule of 72
byu/Niko120 inpersonalfinance
Posted by Niko120
30 Comments
>how is it this easy? Why doesn’t everyone have multi millions by retirement?
If a person does not or cannot create a gap between income and spending, they can’t save, and they’ll be staring at
40=0
47=0
54=0
61=0
68=0
Compound growth is not the hard part. Saving money is.
That is using a non inflation adjusted return, so that $4m is not in today’s dollars, that is in future dollars. So that $4m won’t buy you what $4m would buy you today.
This is where baking inflation into your math is helpful, as you have a frame of reference for inflation adjusted numbers.
Historically inflation has averaged about 3% over long spans of time. So if you use a 7% return instead of a 10% return, you would have inflation adjusted numbers.
As for why doesn’t everyone have millions of dollars in retirement, spend some time around here and see how many posts are asking about raiding money out of their retirement accounts to pay for spending mistakes that people are making in the present. The math is the math, but you need money in the account in order for that money to grow.
Only people with high salaries maxing out their retirement contributions are winding up with multi-million dollar retirement accounts.
Working class people putting in minimal retirement payments (if 401k or 403b is even an option for them) are going to have much more meager accounts and will rely on social security to stay alive paying bills.
Still, small contributions add up over time, so the earlier you start the better
>how is it this easy?
Because it’s straightforward math. You’re adding 10% over the year, or more precisely, you’re adding (1+10%/12) every month, and so on.
>Why doesn’t everyone have multi millions by retirement?
Because contributing is the hard part and lots of people don’t have enough money to do it well
> but it just doesn’t seem right.
You would want to adjust for inflation which effectively means dropping the return to, say, 6 or 7% instead. That 4 million isn’t in 2026 dollars, its in 2054 dollars. At 3% inflation it’s worth about $1.7m in today’s dollars
>Why doesn’t everyone have multi millions by retirement?
All you have to do is read this sub for a week and you will learn why. Some of the reasons include:
* The wasting of money on vehicles far beyond what is strictly needed.
* The holding of high interest rate debt from credit cards, auto loans, payday loans, or personal loans that suck up much of the person’s budget.
* A overall lack of financial education in all areas.
* Rolling over 1 auto loan to a second loan while taking on another expensive vehicle.
* A series of job losses that leads to the depletion of savings and the accumulation of debt.
* A lack of emergency fund that leads to debt.
* An income so low that there is no money left to save.
* Ignorance about, or resistance to use stock market products for investment.
* A lifestyle that does not value saving for the future.
* Living in a high cost of living area that eats up too much of the person’s income.
Because the average savings rate in the US is a paltry 4%.
4% savings rate you’re marginally better than paycheck to paycheck. At 10% this is American dream territory, still not great. At 20% it’s financial freedom maybe even early retirement, at 30%+ it’s early financial freedom and retirement.
Factoring inflation, it’s more like ten years. So, by the time they get there, the number is large, but it won’t feel quite so large, like the “$1MM ain’t enough anymore” crowd. In your case, that means hitting age 70 with $2MM, which is certainly not bad by any means, but it doesn’t quite jump out as much as $4MM.
But yes, the math is real so long as the stock market keeps up. My wife and I have had income that’s ranged from $72k combined at age 22 up to $116k at age 42, and we have a paid-for house worth $400k and around $1.62MM in investments. All we’ve done is invest 40% of our net income (around 30-33% of gross) in broad index funds, utilizing tax advantaged accounts (pre-tax 401k, maxing an HSA, maxing two Roth IRAs). Our investments have outearned our salaries for the last three years.
People don’t do it either because their incomes are too low, they get swept up in lifestyle creep, or they just aren’t educated on investing. That might mean they see it as gambling, it might mean they invest in very conservative funds that don’t grow anywhere close to 10%, it might mean they dump all their money in their company stock. It might mean they don’t even know a Roth IRA exists as an option.
“how is it this easy?”
In addition to some other answers, there is also that I’d guess the vast majority of 40 year olds aren’t sitting on $250k that they can invest for retirement.
> I feel like I’m doing the math correctly, but it just doesn’t seem right
You are doing the math correctly. If you save and invest accordingly, you should have numbers that track similar to this.
Source: an old person who has saved and invested accordingly
It’s not that easy. Most people barely make enough to live even with two incomes.
You first need to understand how luck you are.
The hard part is saving money. The next hard part is not being an idiot and pulling your money out when the headlines go south.
Just to clarify, is the 250K a retirement account or a separate investment account that you’re managing?
$4 million is a lot of money today. It will not be today’s dollars 28 years from now.
A lot of people think they can tolerate a large drawdown. They can’t. They freak out and go to cash. Then get back in after market recovers.
Think about being 61 years old and your well diversified, index ETF portfolio of $2 million just went to $1.3 million.
The obvious answers is hang on, but people get fearful and bail out.
Math is off.
$250k with an annualized 10% return over 20 years = $1.68M. Not inflation adjusted.
Using 7% (inflation adjusted) annualized over 20 years = $967K (today’s dollars).
Make the target bigger by waiting until 65 & max IRA every year.
Starting balance: $250,000
• Annual return: 7%
• Horizon: 25 years
• IRA contributions: $7,500/year from age 40 to 49, then $8,600/year from 50 to 64
That means total contributions over 25 years would be:
• 10 years × $7,500 = $75,000
• 15 years × $8,600 = $129,000
• Total contributed = $204,000
Projected ending value at 7% annualized:
• Starting $250,000 grows to about $1.36 million
• Future IRA contributions grow to about $500k
• Combined ending value: about $1.86 million (today’s dollars)
Those numbers look great, but do not include inflation (2% minimum, ~4% average over the past 50 years). 4% inflation turns that 10% into 6%, so not quite so good, though my calculation still says 650K after 15 years.
It’s worth noting that you have neglected inflation. At 3% annual inflation it is going to take you 10 years to double your purchasing power, so it’s more like:
40=250k
50=500k
60=1 million
67=1.6 million
in today’s dollars. That will allow you to safely withdraw about $64k per year. With social security and a paid off house that will afford a comfortable lifestyle with some extra, but you aren’t going to be rich in terms of the lifestyle you can afford.
Compounding is awesome. Took me 42 years to get to $1M (sounds like we have similar backgrounds with growing up on the poor side). 4 years to hit $2M net worth and six months later I’m at $2.25M already. I know we’re bound to have a dip, we could have job loss, etc. I also benefit from being park of a DINK family.
I saved 12% since I was 21. Blue collar guy. Retired at 58 and it’s cruise control from here on out. It’s not hard but it’s not easy either. I’m 1 of 7 out of 212 at my place that could even think about it. Most have 200k or nothing.
Why not everyone … ?
Because at 40 they think retirement is impossibly far away and withdraw most to use as a down payment on their dream home.
People dig themselves holes that they can’t get out of. Some times it’s not their fault. Sometimes they have a $100k in student loans and majored in art history. Then bought a $40,000 car at 25 percent interest with an 8 year loan and have $30k in credit card debt.
Also keep in mind that investing is much easier today than it was even 35 years ago. The internet removed obstacles which allowed easier access to everyone, along with discount brokerages now being more commonplace. 401k accounts didn’t exist until the early 1980s and the Roth IRA didn’t exist until 1998. To invest you’d need to call or meet with your broker in person. It was a huge barrier for most people. Information wasn’t as readily available and investing was seen as complicated.
I’ve been retired two years, wife retired for one.
Told her our investments have gone up two times what our salary would have been had we not retired.
Her reply, “If I had known it would go up so much after retirement I would have retired years ago.”
Having 250k to spare at 40 isn’t trivial. And then at the end of this, you end up with dollars worth about half of what you started with.
So it’s more like you had 250k and it became 2 million. That’s still powerful growth of course. But it isn’t magic. And the optimistic growth rate does a lot of work here.
If you drop this return to 7% it’s quite a bit less impressive. You end with 1.7 million instead of 3.6. And you still lose half of it to inflation. If you pay 1% fees each year to your 401k manager, now you’re down to 1.3 million. You turned 250k into 1.3 million, but inflation once again takes half of your buying power.
Putting it all together, if you assume 2% inflation and 1% fees over 28 years, you’re effectively growing at 4% now and that 250k ends up being about 750k in those same dollars. That’s a wildly different scenario than the optimistic one (and illustrates the importance of low fees!).
A safer estimate is 7% returns. So your money doubles every 10 years, which makes the mental math easier too.
Read the simple path to wealth. The whole book is about how yes it is literally this easy. People are just not smart with money.
Something to keep in mind is that inflation run 2% a year and living standards rise another 1% so really you gain more like 7% so it doubles every 10 years.
(1) 4 million in 28 years won’t FEEL like 4 million. Sometimes we calculate a 7% return “after inflation” so double the money every 10 years, instead of 7. So, at 68 you end up with what will feel the same as $2 million now. That’s great though! That’s around $80k/year to live on (in today’s dollars).
(2) Why doesn’t everyone? a LOT of people cannot save $250k by 40. Or $125k by 30 or 32. The median income in the US is around $84k. If you pay $1.5k/rent, $500/food, $500 for a car payment, $500 for utilities and car insurance, and $1k for daycare, it is very easy for the remaining $500-$1,200 to get eaten up by health care, phones, emergencies. A lot of people spend their early 30s paying off debt from their late 20s, and then their late 30s paying childcare costs, and don’t put anything in retirement until 40.
(3) A lot of people do! A fair number of them then back off on saving in their 50s or early 60s, or retire early 55-60, or spend a lot- big weddings for a kid, pay for college for kids, gifts of house down payment, etc. People who start saving early and earn above median incomes often have saved way more than necessary, especially when social security is there, and the house is paid off.
American retirees are rich, at least the ones who had a good income in their working years. The mean net worth of those over 60 is like $1.5 million. The median is in the mid $300s. But, around half of people made “below median” income, so those people are not doing so well.
Make sure to adjust your interest rate to inflation =72/(investment return – inflation) to ensure you have the right values.
People will say to expect 7 or 8% and maybe they are right but where is the fun in that? The average return for the past 20 years is 11%. Past 30 years 10%. Past 40 years 12%.
Let’s break all the rules and assume we can continue to get that 10%.
Now what if you continue contributing all of these years? Looking good.
10% is a nominal rate of return. It doesn’t include expected inflation. So as more conservative way to run the same calculation is to use a 6-7% average return, which suggests that your PURCHASING POWER would increase every 10-11 years.