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12% is a VERY unrealistic projection for stock returns given a starting point of S&P 2000 and interest rates at zero.
Under current conditions, I use 6% for stocks and 2% for bonds. Returns could be higher but I want to be conservative. Since nobody after age 45 or so has any business with 100% stock portfolio, factor in some bonds (40% is the usual assumption) and you get a compound rate of return of .6 x 6 + .4 x 2 = 4.4%. This is nominal, not real.
Fortunately, most employed people can invest more than the small amounts in your example.
In 35 years at 3% inflation, $1,000,000 will be worth $355,383 in today's money. At 2% inflation, it will be worth $500,027 in today's money. So you will need a heck of a lot more than a million to retire unless your Social Security contributions are at the maximum, the SS benefit formula is not reduced between now and then, and you live very frugally after retirement.
I agree with most you say, except about age 45 and reduced stocks. This has to be very individual dependent. And particularly much changed with the recession. I was in my 50's just before the recession and became very defensive, reduced equities, increased fixed income and gold, increased non-market related investments and such. But post crash went close to 100% into stocks, at age 59. And since 2009 reaped my greatest rewards since the '80's. Also I still have plenty of future work and investment earnings potential. In my case I might move your 45 suggestion to 65, depending on my physical health probably more than anything.
You are cherry picking the year 2000 which corresponds to the peak of the dot-com bubble.
If you start in either 1996 or 2003, the stock returns are much higher, approaching or reaching the double digits.
Of course everything is dependent on timing. But I essentially agree with Mathjak. By 2000 you should have about been out of dot.com stuff. Then there was the 9/11 Black Swan dip. I made little if any stock gains from 2000-2008. But then of course 2009 might end up being the buy low opportunity of anyone's investment life!
You say we have not had real returns of more than 2% since 2000.
I must be missing something. Because I would lose sleep over 2% returns. At 5%, I would quit investing. What's the point?
At least with 2% you're holding steady, and that's always better than taking losses. 5% isn't so bad. If you averaged 5% on all your investments throughout your investment life, you'd be very well ahead.
Back in the '80's the Feds sued me and a bunch of other high earners that were using a particular actuary with our Define Benefit Plans. Back then this was the greatest tax dodge of all. We claimed annual returns of 5%. The IRS sued us, since as the '80's progressed it was easy for everyone and their mother to gain 10%+ on stocks. But we won out on the suit, as we showed that longer term averages were closer to 5%. And by the time the decision came down, 5% wasn't so bad again.
You have to look at current returns in timely context. If you did 5% from 2000-2008, you've done very well.
In 2008 I invested in solar panels for my roof. Because where else could you get any guaranteed positive returns in that time frame? Solar was/is about a 10% tax free return.
i pick 2000 because the clock pretty much stopped ticking on money invested prior. it was a brick wall in equity history only retracing back to where our money stood 14 years before .
the only money that really had growth was new money. that isn't date minning , that is near no growth for money you had invested going forward regardless of when you put it in prior to 2000.. any money you put in back in 1996 just about stopped growing when it hit 2000 so thats the issue. you are just about where you were back then.
the point being becareful of the growth rates you assume will happen. we are in very different times today with high stock valuations and low rates.
in fact never before in history have stocks hit this level we are at now and not had a major correction within 5 years. that means there is a good chance we may still be around these levels 5 years from now as well retracing back. the 20 year time frame may end up being less than average as is the 15 year record.
In other words, you cherry picked the year.
The wisdom of investing should be understood in terms of typical returns and volatility. If you're trying to make a point about stock returns in the modern era, cherry picking is not the intellectually honest approach.
Which part of all money prior to 2000 had near no growth from 2000 on don't you get?
Very simple concept. Look at what your equities were worth in 2000 and what is all of that worth today not counting the new money added?
It isn't pulling out a particular date range. It is a wall all older money hit no matter how far back you go.
It is like i am up 2000% today since 1987 but 99% of that happened between 1987 to 2000. The average returns look excellent still but the reality is it is living off its past performance as nothing much happened the last 14 years.
In comparison the money added since 2001 did better but that did little for existing money from any prior time frame.
Last edited by mathjak107; 08-28-2014 at 07:28 PM..
I started investing seriously after the 2008 crash. I bought near the bottom when things were on their way up. I'm certain I missed the absolute nadir of the market. But I bought close enough that it doesn't matter.
I ask again -- 2% return? Why bother? May as well leave money in a bank at those rates.
2% real returns are not 2% nominal returns. you are getting negative real returns in a bank. in fact even TIPS are negative returns today.. bonds are zero real return.
actually when it comes to the worst time frames in history for 30 year time frames that a hypothetical retiree had to live through every failure period had one common denominator. the real return from a mix of stocks and bunds fell below 2% real return as a 15 year average during the first 15 years of a 30 year retirement time frame.
these 2% real return periods are nothing new , they happen every so often.
the fact is if you are not spending down to live you stay put and eventually things turn better. you just do not know when.,
Last edited by mathjak107; 08-29-2014 at 03:16 AM..
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