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Of course it does. Your real salary is worth x$ and your real savings is a worth 10-15x$.
You pretty much always have to work with real numbers if you want them to make sense.
As an example, say I put 10k into the stock market (one time) and got a nominal return of 10% for 40 years, so it's $450k then. How much is it actually worth in today's money?
If inflation is zero it's worth $450k. If inflation is 10%, it's worth $10k. If inflation is 15% it's worth $1.7k. Big range.
What kind of nonsense is that?
$450,000 in today's money is equal to $450,000.
Your original $10,000 in 1978 would be equal to $39,658 in 2018, so you've netted $410,342.
1) Does inflation affect the accumulation of money in an account?
2) Does inflation affect the purchasing power of the money in the account?
The answers are "No" and "Yes" for questions 1 & 2, respectively.
Your original post that I responded to, is addressed by question #1. It was a simple accumulation problem - "Save X for 40 years and have Y at the end." And the answer to the question is clearly no, inflation has no affect on it..
However, you and others have changed the original discussion to that addressed by question #2. Which is fine, and I agree with the point. But that isn't what you originally posted, and it isn't what I responded to.
Quote:
Originally Posted by rruff
Of course it does. Your real salary is worth x$ and your real savings is a worth 10-15x$.
You pretty much always have to work with real numbers if you want them to make sense.
No, you don't. Note the two different questions above.
Quote:
As an example, say I put 10k into the stock market (one time) and got a nominal return of 10% for 40 years, so it's $450k then. How much is it actually worth in today's money?
If inflation is zero it's worth $450k. If inflation is 10%, it's worth $10k. If inflation is 15% it's worth $1.7k. Big range.
Perfect. I agree. But as I've stated, that isn't what you posted.
However, you and others have changed the original discussion to that addressed by question #2. Which is fine, and I agree with the point. But that isn't what you originally posted, and it isn't what I responded to.
This is exactly what I posted:
"If someone squirreled away 10% of their income into the stock market for 40 years, they could expect to have 10-15 years of that income saved up at the end. Not exactly "rich". If you saved 25% of your gross you'd have 25-35 years of that income, which is starting to look like a good retirement. But it's also a hefty cost to delayed gratification. Especially for the 50% of the population who's been experiencing declining real incomes and is already near the poverty line."
I didn't "show my work" for calculating it, or list the assumptions (constant real income, constant real return). But since I performed the calculation in the only sensible manner, I didn't think it was necessary.
Still waiting for your alternative calculation that supports your response of "Check your math. Your numbers are WAY off."
"If someone squirreled away 10% of their income into the stock market for 40 years, they could expect to have 10-15 years of that income saved up at the end. Not exactly "rich". If you saved 25% of your gross you'd have 25-35 years of that income, which is starting to look like a good retirement. But it's also a hefty cost to delayed gratification. Especially for the 50% of the population who's been experiencing declining real incomes and is already near the poverty line."
I didn't "show my work" for calculating it, or list the assumptions (constant real income, constant real return). But since I performed the calculation in the only sensible manner, I didn't think it was necessary.
The highlighted portion is the key part of your post. It is a simple accumulation problem, and as such, inflation isn't a factor.
Quote:
Still waiting for your alternative calculation that supports your response of "Check your math. Your numbers are WAY off."
$75,000 annual income, 10% or $7,500 saved each year (1/12 invested each month, ordinary annuity), S&P 500 Index Fund. 12% average return over the last 40 years (per the money chimp website). Monthly compounding. Future value = $7,352,983, or 98 "years of that income saved up at the end" (to use your language). Drop the average return to 8% and you'd have 29 "years of that income saved up at the end" or double your stated amount.
Two things. First, the annual income amount is irrelevant. Second, the nominal return is the appropriate number to use, as we are calculating the accumulation of funds, and NOT the purchasing power of those funds (based on what YOU said in the quoted post above).
Second, the nominal return is the appropriate number to use, as we are calculating the accumulation of funds, and NOT the purchasing power of those funds (based on what YOU said in the quoted post above).
If you aren't relating the accumulation to purchasing power, then what is the point of the exercise?
Like I said, the way I did it is the only way that makes sense.
If you aren't relating the accumulation to purchasing power, then what is the point of the exercise?
Knowing the total amount of accumulated funds provides a baseline upon which other what-if scenarios can be constructed, among other things. It is so widely used in all areas of finance, it really is baffling why you are insisting that it isn’t useful.
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Like I said, the way I did it is the only way that makes sense.
Actually, it isn’t.
Quote:
Originally Posted by rruff
This is exactly what I posted:
"If someone squirreled away 10% of their income into the stock market for 40 years, they could expect to have 10-15 years of that income saved up at the end.
<SNIP>
Based on the scenario that you described, using the nominal rather than the real rate is the ONLY way to determine the amount of that income saved at the end, as you described.
Look at it this way - if someone saves 10% of their income for 40 years, what is the one factor that is needed to compute the amount that will be in the account at the end of the 40 years? Is it the real rate, or the nominal rate? If you use the real rate, you will get an inflation adjusted number related to purchasing power, but you won’t get the amount that is in the account. That requires the nominal rate.
Can you really not see this?
Oh, as requested, I provided my alternative calculation. Any issues with it?
If we’re talking about real-returns, then for simplicity’s sake let’s assume 0% inflation, 0% annual salary growth, and a true annual 5% return.
Even with 0% inflation and a true annual 5% after tax return, one should expect >0% annual salary growth due to (a) human capital accumulation, (b) changes in technology that increase worker productivity, among other things. A 5% ROI implies the worldwide GNP is growing - a reasonable assumption.
To return to the theme of this thread: I, evidently unlike most others, am surprised that stock-ownership in America is so broad.
There may well be some regional variations. For example, in Silicon Valley, it's all about stock. Stock -- founders stock if you're special, stock options of various flavors, restricted stock units, vesting schedules, employee stock purchase plans in which the employer contributes, etc. Salary is how you pay the bills, but stock is how you build wealth, and everyone focuses on it.
Oh man....whenever I get into some sort of opposing discussion with TaxPHD or Mircea.....my first thought is "hmmm...where did I screw up". LMAO.
Dude, listen to these guys, they know what they're talking about and always support their positions.
If you want a "real world" example, I've been throwing about 10% a year into my 401k on average and I currently have about 8x my annual income in there after just 25ish years. Realize of course that if you get to say...20x your annual income you can almost pay a perpetuity of your salary and in another 15 years I'd expect to be close to that or more.
I'm planning on retiring in 7-8 years at most around age 55.
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