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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...
No one is above reproach, or entirely free of error. Sometimes, even the smartest get carried away, and speak beyond their sphere of competence. To reiterate, I'd far rather be proven wrong, and to look laughably foolish, with market-growth faster than that of my assumptions, than to be proven right, merely to end up the poorer.
As for your 401K accumulation, is the 10% from your nominal salary? What about employer matching? And - pardon for switching topics - was your account overweighted in US large-caps?
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.
Oh, as requested, I provided my alternative calculation. Any issues with it?
This is really simple. The "amount that is in the account" requires inflation adjustment to have any meaning at all.
The calculation I'm asking for is is the same example I gave. Put 10% or 25% of your income in a stock fund for 40 years. How much can you expect at the end? I assumed a constant real income, and 5% real return, to make it easy. Any way you do it with sensible numbers you are going to get the same result I did.
Bottom line is that a person should not expect to get rich even with a 25% savings rate, but they will be in pretty good shape and could retire a few years early.
This is really simple. The "amount that is in the account" requires inflation adjustment to have any meaning at all.
The amount in the account is not affected by inflation. Not even a little bit. Not at all. The purchasing power of the money in the account is affected by inflation, but those are two different things.
One last example to try and get the point across.
One invests $1,000 monthly into an account for five years. Nominal return is 10%, real return is 5% over the five year period. At the end of the five years, how much money is in the account?
Households in many countries aren’t investing enough, according to Chicago Booth’s Hans B. Christensen and Mark G. Maffett and Booth PhD candidate Lauren Vollon. Owning stocks can be good for families and drive economic growth—yet the level of equity ownership, especially outside of the United States, is less than what financial theory would consider ideal.
But improving financial-market regulation could help, their research suggests. Christensen, Maffett, and Vollon analyzed how strengthened securities regulation across the European Union affected household investment. Revelations of corporate malfeasance erode trust and deter households from investing in equity markets, but more-stringent securities regulation may restore investor faith, their research suggests.
It goes on:
Quote:
Christensen, Maffett, and Vollon focused their work on two EU measures, the Market Abuse Directive (MAD) and the Markets in Financial Instruments Directive (MiFID), which prohibit insider trading and market manipulation and enhanced consumer protections in the financial-services industry...
By leveling the playing field for market participants, MAD and MiFID significantly increased the willingness of households to place more of their wealth in the equity market, the researchers find. They conclude that regulation can increase confidence in financial markets by disciplining those who don’t play by the rules.
The amount in the account is not affected by inflation. Not even a little bit. Not at all. The purchasing power of the money in the account is affected by inflation, but those are two different things.
The purchasing power *is* the amount. Nominal $ have no relevance until you've corrected them to present value. We always use real $ here because they are the only meaningful metric.
No one uses nominal $ for financial planning unless they are trying to obfuscate, ie make saving money look a lot more lucrative than it actually is.
The purchasing power *is* the amount. Nominal $ have no relevance until you've corrected them to present value. We always use real $ here because they are the only meaningful metric.
No one uses nominal $ for financial planning unless they are trying to obfuscate, ie make saving money look a lot more lucrative than it actually is.
Legions of finance and accounting professors, students, and professionals would disagree with you.
Why don't you answer the previous question? It will make everything abundantly clear. . .
Here it is again:
Quote:
One invests $1,000 monthly into an account for five years. Nominal return is 10%, real return is 5% over the five year period. At the end of the five years, how much money is in the account?
the balance will always be in nominal dollars , what it buys will always be based on inflation adjusted dollars .
hypothetically 1000 bucks in 2012 would have grown to x-amount nominally by 2017 . if markets sucked and over the 5 years were flat , you still have the 1,000 bucks 5 years later but 1000 bucks now takes 1090.00 to just be even so in real return you are not flat you are behind in real return . .
so i will repeat , at the end of the day i only care about real return. the problem is you cannot project real return until the inflation numbers are in for those actual years . we can ball park real return just like we ball park a future nominal return
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