Tuesday, November 30, 2004

More bits and tidbits from Money magazine, December 2004:

  • (pg. 101) Mathematically speaking, retiring with $1 million is no great feat. Say you start at age 30, make $50k a year and get a 3% annual raise. If you put aside 7% of your salary, raise that gradually to 10% and earn 8% per year on your investments, you'll hit $1,042,189 by age 65. Between the arithmetic and reality, however, lie limitless opportunities to mess up.

    Yup. Just makes you want to build a spreadsheet to see the math in action, doesn't it? Okay, well . . . maybe that's just me. But I did build the spreadsheet. I plugged in my own numbers (keeping the 8% annualized return) and watched as Excel bestowed upon me a total of $1,714,310 at age 65. (Contribution limits 20 years hence notwithstanding.) What the spreadsheet makes me realize more than anything, though, is that the most important number in the whole equation is the number in the ___% annualized return spot.

    Don't believe me? My spreadsheet is a mess, and not yet fit for public consumption. So I'll direct you to Bankrate.com's 401k calculator. Plug in whatever numbers you want, or use these:

    Current Savings: $30000
    Monthly Salary: $4100
    Contributing: 8%
    Employer Contribute: 3%
    Rate of Return: 8%
    Years 'til Retire: 33

    Those numbers give an answer of $1,288,803.

    But change the Rate of Return to 5% and you get: $609,109.

    This is why, when financial folks tell me to figure on 12% annual returns from the market, I run screaming. Says Jeremy Siegel, an unabashed (long-term) bull and author of Stocks for the Long Run, "In the past, returns have been greater than they'll be in the future. That's because of the Great Depression, which kept prices down for a while. In the future, that 7% annual return is really the top end of the range" (pg. 156-57).

    When planning for retirement, it pays to be conservative. As we see with the 8% vs. 5% scenario above, those 3 percentage points can make all the difference.

  • — Posted by Michael @ 10:52 AM

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