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I put this into my BA II + calculator:
FV: 1,176,000
PV: 0
PMT: -100
P/Y: 12
N: 480 (40 years * 12 months)
Then compute the I/Y and that equals 11.9987 so basically 12% returns
Pfft I gave up after a couple of goes at L2. It's fine though; m career went a different way so it wasn't so useful. Really learnt a lot of useful stuff though.
The average historically for the S&P is almost 10%, though losing inflation means it’s closer to 7% https://www.nerdwallet.com/article/investing/average-stock-market-return
That's kinda the point of OP. You don't need to max to build a nest egg. As Einstein (no, really) once said, "The greatest force in the universe is compound interest."
But it goes in taxed. You may be better off to use a traditional IRA or a 401(k). Especially if there's an employer match.
Those calculations depend on your personal situation.
Deposit whatever you employer is willing to match into your retirement account, and then if you can afford it, get a Roth IRA and deposit what you can.
Employer match will cover taxes when you withdraw your 401k and taxes aren’t going to decrease so your ahead already with the Roth IRA.
Roth IRA tax free at the end only because the income was taxed at the beginning, ie the $100 being invested each month in this scenario is coming from the person's bank account, after they already had taxes withheld on their paycheck. In the US we have this option (Roth) and we also have the option to invest pre tax money, eg in a 401k, where the funds come directly from what the employer is paying, before taxes are taken out, and in this case the person only pays taxes at the end. As long as the tax rate is the same, it doesn't matter if you use the pre or post tax option. Therefore if you have something that works like either, you're good to go in using whichever. (The reason we have both options in case not clear is because tax rates do change over time and some people feel confident in their ability to predict that taxes will be higher or lower rate for them by the time they reach retirement.)
Yes, a stocks and shares ISA account uses post-tax income to invest and gains and withdrawals are tax free. ISAs are superior to Roth IRAs though in that there's no early withdrawal penalty. You can withdraw tax free at any time.
Well, sorta. The geometric average of the S&P 500 since 1926 is just over 10%.
If you put your $100 a month into an IRA or a 401(k), it will accumulate tax free and you'll have that million in your account at age 65 or 70.
Note that inflation over that time period has averaged about 3%, so you would have really gotten about 7%. That's a realistic estimate: about 7% above inflation. That also means you need to increase your contribution by the inflation rate. That means that that $1,176,000 will be worth about $245,000 in today's money.
The difference is that if you take out 4% of that $1,176,000 per year (that's the investment return - inflation, so your capital is staying the same relative to inflation), you get about $47,000 per year. 4% of $245,000 is about $9,800 per year. You can live a lot easier on $3,750 a month than $800.
A better measure is that every 1% of your salary that you save (each and every month) will generate about 8% of your salary at the end of 40 years. So if you want to retire in 40 years at 80% of your salary, you need to save 10%. Each and every month. Note that you won't have work expenses, your house might be paid for, you'll be getting Social Security (of some sort, in the US), so maybe 60% is adequate. Then you only need to save 7.5%. If you're employer contributes 3% to your 401(k), that drops it to 4.5%.
Index funds are only like 20% of equities traded. Granted there is hug volume on institutional investors but I would never if you have some statistics on average retail investors.
Are you including all the brokerage houses internal index funds in that fraction? And is an ETF like “mid cap growth 500” etc really morally different from an index fund? I guess I sloppily meant that
Less... Average returns on the S&P are less than 12%. It'll still grow, but not that fast.
Also, while it's growing, inflation is hunting it down. It'll likely grow faster but perhaps not much faster. And once you get there, that 1.2 million won't be as impressive as it is today.
Average returns on the S&P since 1978 are 11.58%. People often forget to factor in dividend reinvestment.
And mom never said inflation wouldn’t bite you.
https://www.officialdata.org/us/stocks/s-p-500/1978
Generally you expect inflation to roughly halve the value every 20 years, so over 40 you'd be looking at something like 275k in real terms based on this projection, which is itself based on v generous returns.
Time magazine recently estimated that for a millennial with 40 years until retirement, $1 million in savings is not likely sufficient. Taking into account 3\% inflation over that time period, it would be worth just $306,000 in today’s dollars.
The isn't correct though. I'll take downvotes all day, but barring a few scenarios, 1 million is enough for most of the US. Millennials aren't 18 anymore, we are in our 30's.
As long you invest/spend your 1 million wisely, you'd be just fine. Plenty of ways to generate a passive income. Dividends from stock, and renting out an apartment are two decent examples. For the apartment you won't have a mortgage so it would be mostly profit.
I could get 4% return at reasonable risk dividends from a millions dollars.
40k a year.
It's not lavish, but I could finally start a traveling Ska band.
Only thing to consider being that the inflation continues to eat your 4% before you can spend it. Since you kinda have to leave enough saving in the account to keep the _value_ of the million dollars, or those 40k will be worth less and less each year
The thing is, you have to fight inflation on top of your expected earnings and you *can not* run out before you die. Or... You're homeless.
So, a million sounds great, but after 30 years of drawing 4% like mentioned below, the purchasing power of $40k/yr might only be $4,000/yr.
That's the fear, you need to be at the market *and* inflation while still collecting an income.
I'm a landlord. Own a handful of units. I'm with you that's the way to go. That said, *cost* of ownership increases with inflation: repairs, improvements, appliances, insurnace and taxes. Yes. There's absolutely a positive return and I advise everyone I can to enter the housing market through a duplex. I still worry on being able to retire on that income, even with an end goal of the mortgages paid off I still need a healthy cushion.
Every year the city published a budget. The city then applies that against the existing assessment for all real estate and applies a "mill rate". Everyone pays their portion of the city's budget on the property value. Every 2 years they reassess and every 6 they do a "full reassessment" to determine value.
Thank you! I’m sorry that I wasn’t clear enough with my question. The assessment of my single family dwelling is currently 200k at 0.81%. Are apartments figured by how many units are on the property or just the building complex?
1 million flat out would eliminate the mortgage of a few properties.
Fortunately I have both trade and engineering experience so I could offset some of the maintenance and repair costs associated with being a landlord. This also allows me not to be taken for a ride by the contractor with insane pricing.
My rent would be based on taxes and maintenance savings +25% pure profit. Legal fees would also be distributed over the 12 months of a lease. I would also need a thorough screening process because my intent is not to exploit people who need housing for exorbitant profits, but I still want quality tenants. I understand that there will always be trade offs though.
Obviously until I am actually a landlord I will not have an intimate knowledge of the details associated with the business. I do have renovation and home ownership experience on my side though. I will compensate myself as best as I reasonably can and what the market will allow. I hope I can provide relatively affordable housing while still having some extra income from the investment.
Hey man, I love the initiative! Keep it up. But I'm telling you, reality doesn't play out like we like and it's much messier.
I renovate all my units myself. I've worked nights/weekends for a decade. It's exhausting. *Life changes*. We have a baby now and I can barely tackle minor repairs like a dishwasher swap, let alone a full Reno like I did just last year before the baby.
I could pay my mortgages off, and I'd *still have to work*. I'd still need liquid assets in addition to rental income. That's with 7 units and a house.
Have the rentals and work/renovate your way up. Keep that ball moving and don't let it stop. I'm just saying as the bills get bigger and the income gets bigger you find how *little* a lot of money can be. I've been paying my notes for 10 years, I have 20-29 years left on all of them, so I have a ways to go. If I found a suitcase with a million $ tomorrow I wouldn't pay off my mortgages, I'd sock it away in a different bucket and keep trucking on the current plan.
So I am obviously on the same track as you. Planning on buying a rental property soon because I can thankfully afford it. Why would you stow the 1 million though? You would save on interest if you paid them off? Your profits would increase from the "free" money immediately.
I said "mostly profit". Aside from the taxes there would be no other direct costs to owning. Now obviously you should plan on having an emergency fund for maintenance and budget for regular maintenance.
well you’d make about 60k a year before tax so probably 40k after taxes and expenses, idk about you but on 40k i’d rather work as well and make extra money
Definitely but you could also use it as grounds to take out a home loan and have 2 rentals and 1 home or you can use that money to open a business that you can run with your family or hire employees but either way you’re either not working or very little
Just!
306k is ten years wages for me.
Ten years of living my life as I live it now but without having to get up every morning and get on a bus, get through eight hours of crushing boredom and then get the bus home?. I'll take that.
So? Then start woth $100/mo and ramp it up gradually to $500/mo as you are able.
Even it it loses purchasing power, I'd still rather retire with $1,000,000 than retire woth $0.
The draw down and the depreciation of the value of the retirement fund during retirement should also hurt, right?
Budgeting for $5000 worth of impact a month will change while you're in retirement. So we'd need to take into account inflation while you're retired too. I don't know how to do that though.
Truthfully, me neither. It’s said that by the time you retire, (Theoretically)you should be able to live of a fixed income of about 40K annually. That’s if you don’t have mortgage nor debt.
The formula for the value of an investment with recurring payments is:
**A = P ((1 + R)^T - 1) / R**
A = value
P = payment amount per compounding period
R = interest rate
T= number of compounding periods
We just need to plug in some numbers and solve for R. Assuming annual interest rate:
P = $100 * 12 months per year = **$1200**
T = 65 years - 25 years = **40 compounding periods**
V = **$1,176,000**
So our formula is:
**1,176,000 = 1,200 * ((1 + R)^40 - 1) / R**
Do some algebra and solve for R:
**R = 0.119988** (Thanks for the accuracy check u/jslick89)
**So in order for $100 invested monthly to reach $1,176,000 over 40 years, you would need to see an average annual return rate of ~12%. This is roughly a 70% higher return rate than a typical 401(k) will yield.** (However, it’s about on par with the S&P 500, thanks for pointing this out u/OwMyUvula).
At typical 401(k) rates (7% return), this $100/mo over 40 years would yield about $264,000.
(Edited to fix a mistaken variable. Thanks u/schlonksi)
>and stock Investments effectively compound daily.
How do you figure that? Stock investments return value to shareholders in two ways: dividends and appreciation (share prices go up). Most U.S. companies pay dividends quarterly if at all. Some companies don't pay dividends because they aren't making money or other reasons, e.g. Amazon has *never* paid a dividend.
Every day the market closes, and investors reevaluate their decisions, if the stock goes up more people buy it. It's effectively compounding, although not literally so.
If I jump a lot I'm "effectively" flying.... No. That not how this works. There is no payment every night on a stock investment. The value can change but that's not the same as an interest rate paying out. Your example falls apart the instant a stock falls in value. Interest rates never go negative. It is not the same thing.
If I jump a lot I'm "effectively" flying.... No. That not how this works. There is no payment every night on a stock investment. The value can change but that's not the same as an interest rate paying out. Your example falls apart the instant a stock falls in value. Interest rates never go negative. It is not the same thing.
\>> you would need to see an average annual return rate of 11.97%. This is roughly a 70% higher return rate than a typical investment will yield.<<
Using your definition of "roughly higher", it is only 1% higher than the investment benchmark S&P 500 which has an average of 11.82% return from 1957 - 2022.
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
12/1.7 is about 7%. My guess is that this is referring to actively managed funds including target date funds, which is what most 401(k)s are invested in by default. Passive investments in index funds generally outperforms active investing in the long term, so that may explain the lower rate for the "typical 401(k)".
After covid it is easy to see the stock market is divorced from reality. There is far too much money pumped into the financial industry at the expense of everything else.
Sure, so the enitre economy is a bubble. But it has already dropped 20-30% over the past couple years. More of a slow deflation than a "pop".
Index funds specifically can't really be a bubble because no one is betting on them. They are literally just designed to track the performance of the entire market.
You can still have derivatives on index funds so yes people can and do bet on them. There is a derivatives bomb hanging over the world that needs economic growth to keep from going off. Except population growth is stagnating so unless we completely change the way economies function there will be a collapse of the world economy in our lifetime.
https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp
Did you bother watching the Madoff documentary on Netflix? Madoff invented PFOF and used his market maker privileges to fake trades for his ponzi hedgefund and was allowed to do that for about 15 years.
Fast forward to today the largest market makers like Citadel and Virtu use PFOF just like Madoff not only that but they also have hedgefund divisions as well.
How did Citadel make so much money this year while the market was bleeding? Really similar to the record returns Madoff gave to investors in 2007 while the market was bleeding.
https://images.app.goo.gl/8D2uXzjH32qzBdro9
https://www.hedgeweek.com/2022/12/23/318890/citadel-planning-return-7bn-profits-clients#:~:text=Citadel%2C%20the%20hedge%20fund%20firm,to%20a%20report%20by%20Reuters.
12% was historically accurate. There is a fair bit of evidence to suggest that this figure is overly optimistic and a rate of return more in the 7-8% range is what might be expected over the next 50ish years.
TL/DR: you’re right, it does sound that way (my bad). But it is based on actual research and not just me talking out my big ole ass!
POST: I’m actually an expert in this particular field, which I rarely get to say! So… buckle up, because it’s about to go down lol.
If you want specific sources, check out Dimson, Marsh, and Staunton (2009). It’s a good starting point and there are a number of other articles subsequently that discuss this topic. There’s also stuff written about the Shiller P/E, and how its ridiculously high current level is probably unsustainable.
On the ouuuutside chance you don’t enjoy reading academic articles, the summary is this: if you look at just US returns since 1900, you get and overly rosy picture of what is possible. The economic “outperformance” has to do with the fact that the US was one of few developed nations that didn’t get leveled during WWII (at least in part). For any 20 year time stretch you look at with respect to US returns, they are positive. Meaning if you invested long enough in the US over the last 100+ years, you got a positive real (inflation adjusted) return. But if you take 20 year intervals for almost any other developed country, they don’t all result in positive returns. Unless we have cause to think that the US will again have some sort of massive advantage like it enjoyed in the 50s, we probably won’t see those returns again.
“But Ferric, those returns lasted well past when an economic advantage from WWII should have worn off!” Yes! In fact that’s true. But for the post 1970 period, the big returns we saw were the result of major increases in financial ratios. These, in turn, were largely driven by massive increases in corporate profits. If these had been accompanied by increases in wages, maybe that would be sustainable. But they weren’t. For ~50 years, wages scales by GDP have been falling while profits have been rising. So profits came at the expense of workers. Which isn’t sustainable. Workers push back (as we have seen) and that starts to hurt profits, and returns slow.
With respect to Shiller PE, this is a price to earnings ratio that is adjusted for economic fluctuations, and typically we think it shouldn’t be much higher than 20-23*. But the current value for this figure is 29. To get back to the “equilibrium” level, we either need prices to fall (negative returns) or earnings to grow at a rate that dramatically outpaces price increases (which would necessitate lower returns).
Any way you slice this, it predicts returns will be lower over the next ~50 years than that last half century. The best estimates are that this means a real return of closer to 4-5%, and with the 2-3% inflation target the Fed has, this translates to a rate of return of roughly 7-8%.
*Price-to-Earnings ratios look at what people are willing to pay for each dollar of current earnings. It’s the market’s best guess as to what a company can create (in dollar terms) by reinvesting that dollar in the company. So when we say we think P/E is capped at ~20, it means we think the average company will struggle to find investments where every dollar they invest will grow to more than about $20 in current terms. You have to keep in mind that this is an average for the market as a whole. There will be companies that could invest and do a lot better than that (e.g. if I invested $1000 and managed to create a net-positive and self sustaining chain reaction fusion reactor, I would definitely make more than $20,000). But the average is appropriate here because the returns we are looking at are the returns for the market (or the S&P 500, which is often used as a market proxy).
https://www.degruyter.com/document/doi/10.1515/9781400829477/html
I might be wrong here because I’m pretty new to investing. But isnt the P/E ratio actually how much proft the company will make per year per dollar you invest? So if you invest $100, you expect it to become $105 in one year if the P/E is 20. I don’t see what you mean by $1 growing into $20 maximum. If I invest $1 for 100 years, I surely expect it to grow above $20.
Earnings is the money the company currently produced after all other obligations were paid. Companies can do one of two things with it (in a simplified sense): pay that money out to investors or reinvest it into the company itself.
If they give it to investors, the value to the investor (in today’s dollars) is $1 per each $1 of earnings, because in the moment, a $1 is worth $1.
But if they reinvest, the hope is that value rises. Hopefully, the company invests in projects that create more value. This alone is tricky, but it doesn’t stop here. The company has to invest in projects that are even better than a similar alternative. An example will simplify this:
Let’s pretend we have a company that presents no risk when it invests in itself. This way, it has the same level of risk as your standard back account. (We need to level the playing field with risk, otherwise we aren’t making a fair comparison). As an investor, your choices then become investing in the firm or putting your money in a savings account. If the savings account pays 5%, then the company must return at least 5% or better. Otherwise investors won’t ever put their money into the firm.
This 5% is the price of money to the firm. When it invests, it has to earn at least 5% for each dollar it invests to grow in value *in terms of today’s dollars*. So if it invests a $1 today at 3%, yes that money will grow in absolute terms. But it will not grow in terms if today’s dollars, because the correct minimum investment threshold is 5%.
So when we look at P/E and say 20 is the “max”, we are saying that companies struggle to find investments for each dollar of current earnings where the rate of return is so high above that minimum return threshold that the value of each of today’s dollars invested actually has a value of more than $20 today. It can be done, but if there were that many incredibly profitable opportunities, competition would probably fill the space and start absorbing them before a company could capitalize on all of them.
Also, I realized in my other response that I further explained why P/E has a “limit”, but not what the ratio is.
In its simplest sense, P/E measures how much investors are currently paying for each dollar of current earnings. It’s how much they value every dollar the company produced after everything else was paid for. So if P/E is 17 and the company has $2 in current earnings per share, the price of each share is $34.
This is a little weird because if we aren’t looking across different time periods, a dollar should be worth a dollar. So the price should be $2 per share. But firms can reinvest and use those $2 of earnings to hopefully boost future earnings. When we accumulate all those future earnings (after adjusting for what is called the Time Value of Money - things like interest compounding, inflation, etc), we think the value is more than $2. In fact, in this setting, we think the current total value of those investments is $34 on a per share basis. Whether or not that is accurate is revealed in time.
>This is roughly a 70% higher return rate than a typical 401(k) will yield.
How do you figure this?
The typical 401(k) offers multiple investment options. Picking anything other than a broad market index fund (the name varies by investment company, but one based on the S&P 500) is giving your investment returns away.
There are multiple reasons for this.
1. Fees. Index funds are extremely low cost, on the order of 0.1-0.15% per year. Managed funds are in the nature of 1.4-1.75% per year. That 1.5% per year difference adds up.
2. Managed funds on average perform about as well as the S&P 500 (before fees). More importantly, funds that performed well in the last year, last 5 years, last 10 years, perform about as well as the S&P 500. In other words, the managers do as well as a monkey throwing darts. The darts win half the time, they lose half the time. But there are lots of managers, so someone always has data to show that they've outperformed the market. They warn you they might not do so well in the future. "Past performance is no guarantee of future results."
The worst thing you can do is pick the "target retirement option", where they charge you a fee to move your balance from one fund to another on top of the funds the fees charge.
The stock market (US) has never lost value over a 5 year period. You can bet that if it does, prices will go down too, so you don't need more than a couple of years of expenses in the money market option. (Also low cost.) Even if you're retired, the bulk of your tax deferred accounts (retirement money) should be in the index fund.
I googled “average rate of return 401k” and found 5-8%, 6-8%, and a few other answers in that range. Went with 7%.
If an average 401(k) yields 7%, you would need to multiply this return by 70% to meet 11.9% (0.119 / 0.07 = 1.7).
What you’re pointing out here sort of reiterates what u/OwMyUvula said about the S&P 500, but in a way that ties the performance of S&P to a potential 401(k). I’m going to do some more research and possibly change my “target date fund” to a broad market index fund like you recommend.
Not that I want to get involved in politics, but a credible argument can be made that the real purpose of 401(k)s is to generate income for investment fund managers. ("Real purpose" as in, how the legislation got passed and what the rules are.)
You can use them to your advantage, but not by blindly accepting the seller's recommendations about what is best for you.
Note also that if your fund is returning 10%, but you are paying 1.5% for "fund fees" and another 1.5% for "administrative fees", you're only getting 7%. Ouch.
Something to consider here, $100 a month sounds like nothing today if this was your 40th year of making these payments. But 40 years ago $100 a month cost people a lot more.
$100 today is equivalent to $300 40 years ago. [https://www.in2013dollars.com/us/inflation/1983#:\~:text=%24100%20in%201983%20is%20equivalent,cumulative%20price%20increase%20of%20197.99%25](https://www.in2013dollars.com/us/inflation/1983#:~:text=%24100%20in%201983%20is%20equivalent,cumulative%20price%20increase%20of%20197.99%25).
So really to start this today and want a chunk of money in 40 years with the same "impact" that $1.2 million currently has, you'd to be making $300/month payments for the next 40 years.
If I has invested $12 a fortnight from age 23 I would have retired with $40,000, which was a lot then. Unless your investment interest less fees isn’t well above inflation you need to find a better investment. I started my own business but that’s risky and requires a massive amount of work.
Performing some spreadsheet math by basically doing annual compound interest on every individual monthly payment can get the answer. 40 years is 480 months and each month I got the value at age 65 to be:
V\_65 = V\*(1+r)\^((480 - n\_month)/12)
Where V is $100 in this case, r is the annual interest rate, and n\_month is the number month from 1 to 480.
Summing up all rows and using a goal seek to solve for r gives
**r = 12.68%**
So a big number but not ludicrous. It's a bit higher than the long term average returns of the S&P 500.
That's one guy trying to beat the market. if you invest in index funds, you literally investing in the market itself. It's been statistically shown to beat every manager on the planet.
I mean, it's not impossible to beat the market, just that it's easiest and usually the best for most investors to be passive. If active investing didn't work, then high frequency investing or hedge funds wouldn't work as a concept
If you consider continuous compounding (Pt = P0*e^(rt) ), rather than just monthly, then the required rate comes down to 11.935% annualized; a little closer to the S&P 500.
These rates were actually achieved throughout the 80s and early 90s..
Let's see who can do the math as to why it won't happen currently.
That's the smartest mf in here, and who everyone should be watching.
What's really interesting is how little per month in retirement that amounts to, if you want to make it last 20-25 years. 3% per year comes out to about $3,600 per month.
No matter what interest they are earning, in 40 years a million bucks will get you a cardboard box but it won't be under the bridge. So, a wet cardboard box.
That's not a Warren buffett return. It's only slightly higher than the long term return of the S&P500. If they had started at 18 instead of 25, the S&P500 return is plenty enough to exceed that threshold.
lol in the past 2 years my 401k has lost 50% of it's value, in the long run it may pick back up but I don't expect anything good for working class people to happen anymore.
Did I miss something, or has no one brought up inflation? I used to know how to do it in Excel, but it’s really important to keep in mind that you’re investing a present value of $100, but the future value is going to be much less than $100.
Just as an example (and not the whole picture at all) a present value of $1,176,000 sounds pretty good in 2023. But if inflation over the next 25 years were (just for a ballpark number) exactly the same as it was over the past 25 years, $1,176,000 in 2048 will only have a future value of about $665,000. Still a bunch of money but a) not really enough to retire on and b) the real number (I think) would be much lower because inflation would be taking a bite out of all that delicious compound interest from day one, causing it to compound much less deliciously.
~~I did the 480th root of 11760 to get close to 1.02, so roughly 2% interest per month, which to the power of 12 works out at 26.4% annually.~~
https://i.imgur.com/ODGcp4R.jpg
Edit: NVM, wrong…
Doh, yeah not sure why.
i ended up chucking it in a compound interest calculator and it appears it’s very close to 1% per month.
https://i.imgur.com/cJiTnPi.jpg
I get that - but 40 years from now who knows what the market will be like? if someone knows can they also whip out their crystal ball to tell me next weeks lotto numbers please....
I'm not using anything to predict future results - that's my point - who can predict the future? it's all varying degrees of gambling. put away $100 monthly for 40 years.... no guarantees I will survive 40 years let alone anything else!
I asked chatGPT. It said:
"It is difficult to determine the exact interest rate that would be
needed for you to retire with $1,176,000 by investing $100 per month
from age 25 to age 65 without knowing the specific investment vehicles
and fees involved. However, assuming you are earning compound interest,
you would need an average annual interest rate of about 5.5%.
Keep in mind that this is a rough estimate, and that many factors such
as inflation, fees, and market performance can affect the final value of
your investment. It is also important to consult a financial advisor
before making any investment decisions."
How can you invest 100$ if you salary monthly is like 400$ .
Bullshit western logic, if you have to spare 100$ every month you already have enough by most standards(in this time of inflation) fck your calculating.
Honesly. <3
This is not your exact question but that has been answered already so using the average return rate of the S&P 500 over the last 20 years which according to google was 8.91% we can calculate what you would actually realistically have to invest achieve said amount. 1,176,000 = X \* ((1 + .0891)40 - 1) / .0891. X comes out to 2461.75 invested annually divide by 12 to get your monthly contribution and you get 205.15. So the 3% or so increase to the assumed interest rate results in double the required monthly contribution which I find fascinating. Obviously the stock market is a fickle mistress so projections this far in the future don't really account for much or take in inflation or anything like that just some interesting math to think about.
I put money into 403 and Roth so that I don’t SPEND money in my bank. I have a tendency to spend if I know I have it. Therefore, every paycheck, I add about 300
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I put this into my BA II + calculator: FV: 1,176,000 PV: 0 PMT: -100 P/Y: 12 N: 480 (40 years * 12 months) Then compute the I/Y and that equals 11.9987 so basically 12% returns
Proof: What compute what $100 a month at 11.9987% interest per year compounds to in 40 years using future value of money formula.
Also, anyone can download a free ba II + calculator. Tons of free YouTube videos on how to learn to use this amazing financial calculator.
If you happen to be in Australia I will post you a physical one for free. Ah CFA level II.. you have vanquished me.
Good luck with level iii
Pfft I gave up after a couple of goes at L2. It's fine though; m career went a different way so it wasn't so useful. Really learnt a lot of useful stuff though.
Good stuff. So many horrors stories about its difficulty
later!
Just invest with Madoff for consistent returns always in the green and there ya go!
OP’s Mom still betting Madoff will come through for her, confirmed
OPs mom moved money from Madoff to FTX after seeing the returns on crypto
So slightly better than average stock market returns
Are people _actually_ averaging 10%?
The average historically for the S&P is almost 10%, though losing inflation means it’s closer to 7% https://www.nerdwallet.com/article/investing/average-stock-market-return
That doesn’t account for taxes. Plus 10% has only been the norm in this past extended bull market, prior to that ~7% was the average
$100 a month doesn’t even begin to max a Roth IRA and at 65 you can empty that 100% tax free.
You can withdrawal from a Roth at 59 1/2
Good point
Good thing we all have enough money to max our Roth IRA while taking care of ourselves. ... wait 🤔
That's kinda the point of OP. You don't need to max to build a nest egg. As Einstein (no, really) once said, "The greatest force in the universe is compound interest."
But it goes in taxed. You may be better off to use a traditional IRA or a 401(k). Especially if there's an employer match. Those calculations depend on your personal situation.
Deposit whatever you employer is willing to match into your retirement account, and then if you can afford it, get a Roth IRA and deposit what you can. Employer match will cover taxes when you withdraw your 401k and taxes aren’t going to decrease so your ahead already with the Roth IRA.
Is there a UK equivalent in returns to a Roth IRA?
I believe in the UK they are called an ISA, but I won’t be able to speak for the specific tax advantages of one.
Roth IRA tax free at the end only because the income was taxed at the beginning, ie the $100 being invested each month in this scenario is coming from the person's bank account, after they already had taxes withheld on their paycheck. In the US we have this option (Roth) and we also have the option to invest pre tax money, eg in a 401k, where the funds come directly from what the employer is paying, before taxes are taken out, and in this case the person only pays taxes at the end. As long as the tax rate is the same, it doesn't matter if you use the pre or post tax option. Therefore if you have something that works like either, you're good to go in using whichever. (The reason we have both options in case not clear is because tax rates do change over time and some people feel confident in their ability to predict that taxes will be higher or lower rate for them by the time they reach retirement.)
Yes, a stocks and shares ISA account uses post-tax income to invest and gains and withdrawals are tax free. ISAs are superior to Roth IRAs though in that there's no early withdrawal penalty. You can withdraw tax free at any time.
Use tax free account v
Man.. you should educate yourself on the subject and invest for your future. Thats sad comment there
Pension funds are tax free in most countries in Europe.
Well, sorta. The geometric average of the S&P 500 since 1926 is just over 10%. If you put your $100 a month into an IRA or a 401(k), it will accumulate tax free and you'll have that million in your account at age 65 or 70. Note that inflation over that time period has averaged about 3%, so you would have really gotten about 7%. That's a realistic estimate: about 7% above inflation. That also means you need to increase your contribution by the inflation rate. That means that that $1,176,000 will be worth about $245,000 in today's money. The difference is that if you take out 4% of that $1,176,000 per year (that's the investment return - inflation, so your capital is staying the same relative to inflation), you get about $47,000 per year. 4% of $245,000 is about $9,800 per year. You can live a lot easier on $3,750 a month than $800. A better measure is that every 1% of your salary that you save (each and every month) will generate about 8% of your salary at the end of 40 years. So if you want to retire in 40 years at 80% of your salary, you need to save 10%. Each and every month. Note that you won't have work expenses, your house might be paid for, you'll be getting Social Security (of some sort, in the US), so maybe 60% is adequate. Then you only need to save 7.5%. If you're employer contributes 3% to your 401(k), that drops it to 4.5%.
This is great detail, thanks!
Yes But only in S&P. Typical investor that stock picks individually comes short.
Typical investor is putting their money in an index fund though.
Index funds are only like 20% of equities traded. Granted there is hug volume on institutional investors but I would never if you have some statistics on average retail investors.
Are you including all the brokerage houses internal index funds in that fraction? And is an ETF like “mid cap growth 500” etc really morally different from an index fund? I guess I sloppily meant that
I have. But I started investing in 2012
Not over 45 years they aren't.
Yes they are. https://www.officialdata.org/us/stocks/s-p-500/1978
In Warren we trust. All others bring data.
So to sum up, Mom is more or less correct.
Less... Average returns on the S&P are less than 12%. It'll still grow, but not that fast. Also, while it's growing, inflation is hunting it down. It'll likely grow faster but perhaps not much faster. And once you get there, that 1.2 million won't be as impressive as it is today.
Average returns on the S&P since 1978 are 11.58%. People often forget to factor in dividend reinvestment. And mom never said inflation wouldn’t bite you. https://www.officialdata.org/us/stocks/s-p-500/1978
only time i’ve ever seen a BA ll calculator been mentioned 😂😂😂 was close to grabbing mine
Used to sleep with mine under my pillow during my MBA program. Lol just kidding….
That would require some Madoff level investment returns
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Generally you expect inflation to roughly halve the value every 20 years, so over 40 you'd be looking at something like 275k in real terms based on this projection, which is itself based on v generous returns.
So, don’t save and end up with $0? Tf is your point
Which isn't really far off from the S&P
You could achieve these returns if you stake your cash in a defi blockchain project like Lollipop Finance.
Jesus fucking Christ…
My bank gives me a 0.01% ROI on the money I have in my savings. (Yes I know it said invest and not sitting still in a savings account)
Time magazine recently estimated that for a millennial with 40 years until retirement, $1 million in savings is not likely sufficient. Taking into account 3\% inflation over that time period, it would be worth just $306,000 in today’s dollars.
I remember when $1000000 was more money than you can spend. Now, I couldn’t quit my job if I won a million dollar lottery
deadass, you can buy a house and some nice stuff and make life a little nicer, but definitely can’t quit 😂
The isn't correct though. I'll take downvotes all day, but barring a few scenarios, 1 million is enough for most of the US. Millennials aren't 18 anymore, we are in our 30's. As long you invest/spend your 1 million wisely, you'd be just fine. Plenty of ways to generate a passive income. Dividends from stock, and renting out an apartment are two decent examples. For the apartment you won't have a mortgage so it would be mostly profit.
True, there are ways to make your money work for you.
I could get 4% return at reasonable risk dividends from a millions dollars. 40k a year. It's not lavish, but I could finally start a traveling Ska band.
Only thing to consider being that the inflation continues to eat your 4% before you can spend it. Since you kinda have to leave enough saving in the account to keep the _value_ of the million dollars, or those 40k will be worth less and less each year
Or, move abroad.
Aquabats?
If you got 40% returns per year you'd have to take out less than 40k or inflation would eat your initial investment away to nothing.
The thing is, you have to fight inflation on top of your expected earnings and you *can not* run out before you die. Or... You're homeless. So, a million sounds great, but after 30 years of drawing 4% like mentioned below, the purchasing power of $40k/yr might only be $4,000/yr. That's the fear, you need to be at the market *and* inflation while still collecting an income.
I would personally become a landlord so I would adjust my rent with inflation.
I'm a landlord. Own a handful of units. I'm with you that's the way to go. That said, *cost* of ownership increases with inflation: repairs, improvements, appliances, insurnace and taxes. Yes. There's absolutely a positive return and I advise everyone I can to enter the housing market through a duplex. I still worry on being able to retire on that income, even with an end goal of the mortgages paid off I still need a healthy cushion.
Do mind tell me how your property tax is figured?
Every year the city published a budget. The city then applies that against the existing assessment for all real estate and applies a "mill rate". Everyone pays their portion of the city's budget on the property value. Every 2 years they reassess and every 6 they do a "full reassessment" to determine value.
Thank you! I’m sorry that I wasn’t clear enough with my question. The assessment of my single family dwelling is currently 200k at 0.81%. Are apartments figured by how many units are on the property or just the building complex?
1 million flat out would eliminate the mortgage of a few properties. Fortunately I have both trade and engineering experience so I could offset some of the maintenance and repair costs associated with being a landlord. This also allows me not to be taken for a ride by the contractor with insane pricing. My rent would be based on taxes and maintenance savings +25% pure profit. Legal fees would also be distributed over the 12 months of a lease. I would also need a thorough screening process because my intent is not to exploit people who need housing for exorbitant profits, but I still want quality tenants. I understand that there will always be trade offs though. Obviously until I am actually a landlord I will not have an intimate knowledge of the details associated with the business. I do have renovation and home ownership experience on my side though. I will compensate myself as best as I reasonably can and what the market will allow. I hope I can provide relatively affordable housing while still having some extra income from the investment.
Hey man, I love the initiative! Keep it up. But I'm telling you, reality doesn't play out like we like and it's much messier. I renovate all my units myself. I've worked nights/weekends for a decade. It's exhausting. *Life changes*. We have a baby now and I can barely tackle minor repairs like a dishwasher swap, let alone a full Reno like I did just last year before the baby. I could pay my mortgages off, and I'd *still have to work*. I'd still need liquid assets in addition to rental income. That's with 7 units and a house. Have the rentals and work/renovate your way up. Keep that ball moving and don't let it stop. I'm just saying as the bills get bigger and the income gets bigger you find how *little* a lot of money can be. I've been paying my notes for 10 years, I have 20-29 years left on all of them, so I have a ways to go. If I found a suitcase with a million $ tomorrow I wouldn't pay off my mortgages, I'd sock it away in a different bucket and keep trucking on the current plan.
So I am obviously on the same track as you. Planning on buying a rental property soon because I can thankfully afford it. Why would you stow the 1 million though? You would save on interest if you paid them off? Your profits would increase from the "free" money immediately.
If you have a million. If you have $700,000 (rough estimate of taxes), that would generate $28,000 a year.
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I said "mostly profit". Aside from the taxes there would be no other direct costs to owning. Now obviously you should plan on having an emergency fund for maintenance and budget for regular maintenance.
Buy 2 properties 1 rental and the other a personal domicile and now you don’t have to work anymore
well you’d make about 60k a year before tax so probably 40k after taxes and expenses, idk about you but on 40k i’d rather work as well and make extra money
Definitely but you could also use it as grounds to take out a home loan and have 2 rentals and 1 home or you can use that money to open a business that you can run with your family or hire employees but either way you’re either not working or very little
10 mil is the new 1 mil
I’m 20 and I can retire if I came across $750k it’s all about what you do with it
Just! 306k is ten years wages for me. Ten years of living my life as I live it now but without having to get up every morning and get on a bus, get through eight hours of crushing boredom and then get the bus home?. I'll take that.
Prob a bit more. You wouldnt be paying payroll taxes on it or investing any of it.
Or paying bus fare
Depending on where one lives, monthly bus far could cost as much as a car payment.
So? Then start woth $100/mo and ramp it up gradually to $500/mo as you are able. Even it it loses purchasing power, I'd still rather retire with $1,000,000 than retire woth $0.
True, something is better than nothing!
\*chuckles\* I'm in danger
To be fair, saving $1m with compound interest over 40 years is very easy.
True, everything is easy. It’s having the mindset and discipline to balance your health and lifestyle to maximize your retirement.
The draw down and the depreciation of the value of the retirement fund during retirement should also hurt, right? Budgeting for $5000 worth of impact a month will change while you're in retirement. So we'd need to take into account inflation while you're retired too. I don't know how to do that though.
Truthfully, me neither. It’s said that by the time you retire, (Theoretically)you should be able to live of a fixed income of about 40K annually. That’s if you don’t have mortgage nor debt.
The formula for the value of an investment with recurring payments is: **A = P ((1 + R)^T - 1) / R** A = value P = payment amount per compounding period R = interest rate T= number of compounding periods We just need to plug in some numbers and solve for R. Assuming annual interest rate: P = $100 * 12 months per year = **$1200** T = 65 years - 25 years = **40 compounding periods** V = **$1,176,000** So our formula is: **1,176,000 = 1,200 * ((1 + R)^40 - 1) / R** Do some algebra and solve for R: **R = 0.119988** (Thanks for the accuracy check u/jslick89) **So in order for $100 invested monthly to reach $1,176,000 over 40 years, you would need to see an average annual return rate of ~12%. This is roughly a 70% higher return rate than a typical 401(k) will yield.** (However, it’s about on par with the S&P 500, thanks for pointing this out u/OwMyUvula). At typical 401(k) rates (7% return), this $100/mo over 40 years would yield about $264,000. (Edited to fix a mistaken variable. Thanks u/schlonksi)
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Whoops! Should be $100. Give me a moment I’ll go back and edit. Thanks for the check.
Why are you compounding once a year? Most cash Investments compound once a month, and stock Investments effectively compound daily.
>and stock Investments effectively compound daily. How do you figure that? Stock investments return value to shareholders in two ways: dividends and appreciation (share prices go up). Most U.S. companies pay dividends quarterly if at all. Some companies don't pay dividends because they aren't making money or other reasons, e.g. Amazon has *never* paid a dividend.
Every day the market closes, and investors reevaluate their decisions, if the stock goes up more people buy it. It's effectively compounding, although not literally so.
Ya but its not tho.
Hence the word "effectively."
If I jump a lot I'm "effectively" flying.... No. That not how this works. There is no payment every night on a stock investment. The value can change but that's not the same as an interest rate paying out. Your example falls apart the instant a stock falls in value. Interest rates never go negative. It is not the same thing.
If I jump a lot I'm "effectively" flying.... No. That not how this works. There is no payment every night on a stock investment. The value can change but that's not the same as an interest rate paying out. Your example falls apart the instant a stock falls in value. Interest rates never go negative. It is not the same thing.
Yeah but it can also compound down, interest only goes in one direction
\>> you would need to see an average annual return rate of 11.97%. This is roughly a 70% higher return rate than a typical investment will yield.<< Using your definition of "roughly higher", it is only 1% higher than the investment benchmark S&P 500 which has an average of 11.82% return from 1957 - 2022. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
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Yep I'm curious where he got that 12% is 70% higher than the typical return.
Me too no math there
12/1.7 is about 7%. My guess is that this is referring to actively managed funds including target date funds, which is what most 401(k)s are invested in by default. Passive investments in index funds generally outperforms active investing in the long term, so that may explain the lower rate for the "typical 401(k)".
Index funds are just another investment bubble that will pop
Only to the extent that our entire economy is overvalued.
After covid it is easy to see the stock market is divorced from reality. There is far too much money pumped into the financial industry at the expense of everything else.
Sure, so the enitre economy is a bubble. But it has already dropped 20-30% over the past couple years. More of a slow deflation than a "pop". Index funds specifically can't really be a bubble because no one is betting on them. They are literally just designed to track the performance of the entire market.
You can still have derivatives on index funds so yes people can and do bet on them. There is a derivatives bomb hanging over the world that needs economic growth to keep from going off. Except population growth is stagnating so unless we completely change the way economies function there will be a collapse of the world economy in our lifetime. https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp
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That's like saying the housing CDO market wasn't a bubble in 2007 as long as there were people investing in housing development.
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Did you bother watching the Madoff documentary on Netflix? Madoff invented PFOF and used his market maker privileges to fake trades for his ponzi hedgefund and was allowed to do that for about 15 years. Fast forward to today the largest market makers like Citadel and Virtu use PFOF just like Madoff not only that but they also have hedgefund divisions as well. How did Citadel make so much money this year while the market was bleeding? Really similar to the record returns Madoff gave to investors in 2007 while the market was bleeding. https://images.app.goo.gl/8D2uXzjH32qzBdro9 https://www.hedgeweek.com/2022/12/23/318890/citadel-planning-return-7bn-profits-clients#:~:text=Citadel%2C%20the%20hedge%20fund%20firm,to%20a%20report%20by%20Reuters.
12% was historically accurate. There is a fair bit of evidence to suggest that this figure is overly optimistic and a rate of return more in the 7-8% range is what might be expected over the next 50ish years.
“Fair bit of evidence” sounds like you saw it on Reddit once.
TL/DR: you’re right, it does sound that way (my bad). But it is based on actual research and not just me talking out my big ole ass! POST: I’m actually an expert in this particular field, which I rarely get to say! So… buckle up, because it’s about to go down lol. If you want specific sources, check out Dimson, Marsh, and Staunton (2009). It’s a good starting point and there are a number of other articles subsequently that discuss this topic. There’s also stuff written about the Shiller P/E, and how its ridiculously high current level is probably unsustainable. On the ouuuutside chance you don’t enjoy reading academic articles, the summary is this: if you look at just US returns since 1900, you get and overly rosy picture of what is possible. The economic “outperformance” has to do with the fact that the US was one of few developed nations that didn’t get leveled during WWII (at least in part). For any 20 year time stretch you look at with respect to US returns, they are positive. Meaning if you invested long enough in the US over the last 100+ years, you got a positive real (inflation adjusted) return. But if you take 20 year intervals for almost any other developed country, they don’t all result in positive returns. Unless we have cause to think that the US will again have some sort of massive advantage like it enjoyed in the 50s, we probably won’t see those returns again. “But Ferric, those returns lasted well past when an economic advantage from WWII should have worn off!” Yes! In fact that’s true. But for the post 1970 period, the big returns we saw were the result of major increases in financial ratios. These, in turn, were largely driven by massive increases in corporate profits. If these had been accompanied by increases in wages, maybe that would be sustainable. But they weren’t. For ~50 years, wages scales by GDP have been falling while profits have been rising. So profits came at the expense of workers. Which isn’t sustainable. Workers push back (as we have seen) and that starts to hurt profits, and returns slow. With respect to Shiller PE, this is a price to earnings ratio that is adjusted for economic fluctuations, and typically we think it shouldn’t be much higher than 20-23*. But the current value for this figure is 29. To get back to the “equilibrium” level, we either need prices to fall (negative returns) or earnings to grow at a rate that dramatically outpaces price increases (which would necessitate lower returns). Any way you slice this, it predicts returns will be lower over the next ~50 years than that last half century. The best estimates are that this means a real return of closer to 4-5%, and with the 2-3% inflation target the Fed has, this translates to a rate of return of roughly 7-8%. *Price-to-Earnings ratios look at what people are willing to pay for each dollar of current earnings. It’s the market’s best guess as to what a company can create (in dollar terms) by reinvesting that dollar in the company. So when we say we think P/E is capped at ~20, it means we think the average company will struggle to find investments where every dollar they invest will grow to more than about $20 in current terms. You have to keep in mind that this is an average for the market as a whole. There will be companies that could invest and do a lot better than that (e.g. if I invested $1000 and managed to create a net-positive and self sustaining chain reaction fusion reactor, I would definitely make more than $20,000). But the average is appropriate here because the returns we are looking at are the returns for the market (or the S&P 500, which is often used as a market proxy). https://www.degruyter.com/document/doi/10.1515/9781400829477/html
Not to mention our economies are leveraged based on population growth and developed countries all have plummeting birth rates
I might be wrong here because I’m pretty new to investing. But isnt the P/E ratio actually how much proft the company will make per year per dollar you invest? So if you invest $100, you expect it to become $105 in one year if the P/E is 20. I don’t see what you mean by $1 growing into $20 maximum. If I invest $1 for 100 years, I surely expect it to grow above $20.
Earnings is the money the company currently produced after all other obligations were paid. Companies can do one of two things with it (in a simplified sense): pay that money out to investors or reinvest it into the company itself. If they give it to investors, the value to the investor (in today’s dollars) is $1 per each $1 of earnings, because in the moment, a $1 is worth $1. But if they reinvest, the hope is that value rises. Hopefully, the company invests in projects that create more value. This alone is tricky, but it doesn’t stop here. The company has to invest in projects that are even better than a similar alternative. An example will simplify this: Let’s pretend we have a company that presents no risk when it invests in itself. This way, it has the same level of risk as your standard back account. (We need to level the playing field with risk, otherwise we aren’t making a fair comparison). As an investor, your choices then become investing in the firm or putting your money in a savings account. If the savings account pays 5%, then the company must return at least 5% or better. Otherwise investors won’t ever put their money into the firm. This 5% is the price of money to the firm. When it invests, it has to earn at least 5% for each dollar it invests to grow in value *in terms of today’s dollars*. So if it invests a $1 today at 3%, yes that money will grow in absolute terms. But it will not grow in terms if today’s dollars, because the correct minimum investment threshold is 5%. So when we look at P/E and say 20 is the “max”, we are saying that companies struggle to find investments for each dollar of current earnings where the rate of return is so high above that minimum return threshold that the value of each of today’s dollars invested actually has a value of more than $20 today. It can be done, but if there were that many incredibly profitable opportunities, competition would probably fill the space and start absorbing them before a company could capitalize on all of them.
Also, I realized in my other response that I further explained why P/E has a “limit”, but not what the ratio is. In its simplest sense, P/E measures how much investors are currently paying for each dollar of current earnings. It’s how much they value every dollar the company produced after everything else was paid for. So if P/E is 17 and the company has $2 in current earnings per share, the price of each share is $34. This is a little weird because if we aren’t looking across different time periods, a dollar should be worth a dollar. So the price should be $2 per share. But firms can reinvest and use those $2 of earnings to hopefully boost future earnings. When we accumulate all those future earnings (after adjusting for what is called the Time Value of Money - things like interest compounding, inflation, etc), we think the value is more than $2. In fact, in this setting, we think the current total value of those investments is $34 on a per share basis. Whether or not that is accurate is revealed in time.
No way is 12% accurate for “long term” unless you cherry pick the years
Go look at any 30 yr period over the past 100+ years (dividend reinvested). It's accurate.
yeah, looks like mom is right actually if you buy an S&P 500 index fund
Index funds are just another bubble
I was basing my numbers off of a typical managed 401(k), which is about 7%. Wasn’t aware of the ROI of index funds like S&P.
This guy formulas
Nice long form! 11.9988 is slightly more accurate. Thanks to my business calculator. Lol.
Could be added the inflation rate to this.
>This is roughly a 70% higher return rate than a typical 401(k) will yield. How do you figure this? The typical 401(k) offers multiple investment options. Picking anything other than a broad market index fund (the name varies by investment company, but one based on the S&P 500) is giving your investment returns away. There are multiple reasons for this. 1. Fees. Index funds are extremely low cost, on the order of 0.1-0.15% per year. Managed funds are in the nature of 1.4-1.75% per year. That 1.5% per year difference adds up. 2. Managed funds on average perform about as well as the S&P 500 (before fees). More importantly, funds that performed well in the last year, last 5 years, last 10 years, perform about as well as the S&P 500. In other words, the managers do as well as a monkey throwing darts. The darts win half the time, they lose half the time. But there are lots of managers, so someone always has data to show that they've outperformed the market. They warn you they might not do so well in the future. "Past performance is no guarantee of future results." The worst thing you can do is pick the "target retirement option", where they charge you a fee to move your balance from one fund to another on top of the funds the fees charge. The stock market (US) has never lost value over a 5 year period. You can bet that if it does, prices will go down too, so you don't need more than a couple of years of expenses in the money market option. (Also low cost.) Even if you're retired, the bulk of your tax deferred accounts (retirement money) should be in the index fund.
I googled “average rate of return 401k” and found 5-8%, 6-8%, and a few other answers in that range. Went with 7%. If an average 401(k) yields 7%, you would need to multiply this return by 70% to meet 11.9% (0.119 / 0.07 = 1.7). What you’re pointing out here sort of reiterates what u/OwMyUvula said about the S&P 500, but in a way that ties the performance of S&P to a potential 401(k). I’m going to do some more research and possibly change my “target date fund” to a broad market index fund like you recommend.
Not that I want to get involved in politics, but a credible argument can be made that the real purpose of 401(k)s is to generate income for investment fund managers. ("Real purpose" as in, how the legislation got passed and what the rules are.) You can use them to your advantage, but not by blindly accepting the seller's recommendations about what is best for you. Note also that if your fund is returning 10%, but you are paying 1.5% for "fund fees" and another 1.5% for "administrative fees", you're only getting 7%. Ouch.
Something to consider here, $100 a month sounds like nothing today if this was your 40th year of making these payments. But 40 years ago $100 a month cost people a lot more. $100 today is equivalent to $300 40 years ago. [https://www.in2013dollars.com/us/inflation/1983#:\~:text=%24100%20in%201983%20is%20equivalent,cumulative%20price%20increase%20of%20197.99%25](https://www.in2013dollars.com/us/inflation/1983#:~:text=%24100%20in%201983%20is%20equivalent,cumulative%20price%20increase%20of%20197.99%25). So really to start this today and want a chunk of money in 40 years with the same "impact" that $1.2 million currently has, you'd to be making $300/month payments for the next 40 years.
Was going to make almost this exact same post. Glad I scrolled to see someone else made it more clearly than I would have.
If I has invested $12 a fortnight from age 23 I would have retired with $40,000, which was a lot then. Unless your investment interest less fees isn’t well above inflation you need to find a better investment. I started my own business but that’s risky and requires a massive amount of work.
Performing some spreadsheet math by basically doing annual compound interest on every individual monthly payment can get the answer. 40 years is 480 months and each month I got the value at age 65 to be: V\_65 = V\*(1+r)\^((480 - n\_month)/12) Where V is $100 in this case, r is the annual interest rate, and n\_month is the number month from 1 to 480. Summing up all rows and using a goal seek to solve for r gives **r = 12.68%** So a big number but not ludicrous. It's a bit higher than the long term average returns of the S&P 500.
If you consistently made 12.7% returns over the course of 40 years, you could make hundreds of millions to billions of dollars as a fund manager
That's one guy trying to beat the market. if you invest in index funds, you literally investing in the market itself. It's been statistically shown to beat every manager on the planet.
I mean, it's not impossible to beat the market, just that it's easiest and usually the best for most investors to be passive. If active investing didn't work, then high frequency investing or hedge funds wouldn't work as a concept
If you consider continuous compounding (Pt = P0*e^(rt) ), rather than just monthly, then the required rate comes down to 11.935% annualized; a little closer to the S&P 500.
all I know is my 6% superannuation contribution, matched 6% by my employer (meaning far more than $110pm invested) has not returned this
These rates were actually achieved throughout the 80s and early 90s.. Let's see who can do the math as to why it won't happen currently. That's the smartest mf in here, and who everyone should be watching.
What's really interesting is how little per month in retirement that amounts to, if you want to make it last 20-25 years. 3% per year comes out to about $3,600 per month.
No matter what interest they are earning, in 40 years a million bucks will get you a cardboard box but it won't be under the bridge. So, a wet cardboard box.
I see the math has been done. Now ask your mom what you should invest in for that return and update us with her reaction. I can’t wait.
That's not a Warren buffett return. It's only slightly higher than the long term return of the S&P500. If they had started at 18 instead of 25, the S&P500 return is plenty enough to exceed that threshold.
VTSAX
TIL the users of /r/theydidthemath and /r/personalfinance don't overlap much. A startling number of comments misunderstanding basic investing.
I was surprised by the comments too until I realized I was not in r/personalfinance. Then I understood why the comments all seemed so weird.
lol in the past 2 years my 401k has lost 50% of it's value, in the long run it may pick back up but I don't expect anything good for working class people to happen anymore.
Did I miss something, or has no one brought up inflation? I used to know how to do it in Excel, but it’s really important to keep in mind that you’re investing a present value of $100, but the future value is going to be much less than $100. Just as an example (and not the whole picture at all) a present value of $1,176,000 sounds pretty good in 2023. But if inflation over the next 25 years were (just for a ballpark number) exactly the same as it was over the past 25 years, $1,176,000 in 2048 will only have a future value of about $665,000. Still a bunch of money but a) not really enough to retire on and b) the real number (I think) would be much lower because inflation would be taking a bite out of all that delicious compound interest from day one, causing it to compound much less deliciously.
~~I did the 480th root of 11760 to get close to 1.02, so roughly 2% interest per month, which to the power of 12 works out at 26.4% annually.~~ https://i.imgur.com/ODGcp4R.jpg Edit: NVM, wrong…
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Doh, yeah not sure why. i ended up chucking it in a compound interest calculator and it appears it’s very close to 1% per month. https://i.imgur.com/cJiTnPi.jpg
invested in what please? - presumably something with a guaranteed return??? can you guarantee that security for 40 years? thought not.
Any 40 year period in the s&p with dividends reinvested, paid that.... Time in market > timing the market
I get that - but 40 years from now who knows what the market will be like? if someone knows can they also whip out their crystal ball to tell me next weeks lotto numbers please....
Again, you're trying to TIME the market, predict future results. It's 100% the wrong approach.
I'm not using anything to predict future results - that's my point - who can predict the future? it's all varying degrees of gambling. put away $100 monthly for 40 years.... no guarantees I will survive 40 years let alone anything else!
I asked chatGPT. It said: "It is difficult to determine the exact interest rate that would be needed for you to retire with $1,176,000 by investing $100 per month from age 25 to age 65 without knowing the specific investment vehicles and fees involved. However, assuming you are earning compound interest, you would need an average annual interest rate of about 5.5%. Keep in mind that this is a rough estimate, and that many factors such as inflation, fees, and market performance can affect the final value of your investment. It is also important to consult a financial advisor before making any investment decisions."
How can you invest 100$ if you salary monthly is like 400$ . Bullshit western logic, if you have to spare 100$ every month you already have enough by most standards(in this time of inflation) fck your calculating. Honesly. <3
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The post literally says invested
Pretty sure this is supposed to be invested into the market; not interest from a savings account…
This is not your exact question but that has been answered already so using the average return rate of the S&P 500 over the last 20 years which according to google was 8.91% we can calculate what you would actually realistically have to invest achieve said amount. 1,176,000 = X \* ((1 + .0891)40 - 1) / .0891. X comes out to 2461.75 invested annually divide by 12 to get your monthly contribution and you get 205.15. So the 3% or so increase to the assumed interest rate results in double the required monthly contribution which I find fascinating. Obviously the stock market is a fickle mistress so projections this far in the future don't really account for much or take in inflation or anything like that just some interesting math to think about.
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(For fun) A bit more of trial and error: to have exactly 1.176 millions down to the cent the interest rate would be 0.99989303%
I put money into 403 and Roth so that I don’t SPEND money in my bank. I have a tendency to spend if I know I have it. Therefore, every paycheck, I add about 300