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
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.