Congratulations, class of 2012!
Let's say you've just graduated from a 4 year college. Doesn't matter the profession. You've gotten a full-time position for the day after graduation, in a job that you may or may not like. You have dreams. You want to go on vacations. You want to live a certain way, with your paycheck being your only limiter. You want to live debt-free, simply within your means. You will never miss a payment in your life and you'll have a nice family in a nice neighborhood, relative to the money you make. And you want to retire at a 'reasonable' age, let's say 62, in 40 years.
You're also smarter than most: you KNOW that IRA's and mutual funds are loads of baloney. This is the year 2012 and you saw how they flopped. But you know you're somewhat savvy with the financial markets: you have the ability to get a 5% (conservative) annual return on your money at the end of it all. And let's say that despite market ups and downs, you're still able to get that 40 years from now.
Here's the kicker: you want to live the same way your entire life, making the same amount of money to the day of your death, which will be at around 72 if you're lucky.
So, let's put some numbers in here. You're making $40,000 a year. You're going to work for 40 years. You want to make $40,000 passively at the end of your working years, 5% annual return. You're going to need $800,000 nest-egg in order to do that. So, $800,000 divided by 40 is $20,000. That's half your paycheck. Now, you're paying off student loans and rent. You're gonna be eating Top Ramen and watching TV through your 15" laptop monitor.
But you're left with an extra $20,000 a year from your passive income, now that you no longer have to save it! Well, it's going to go into medical costs and, factoring in for inflation, you're going to have to live off of every penny of that $40,000 a year.
No matter how much you make, with these numbers, you will have to save HALF of your paycheck in order to get a passive return on your money of 5% annually at the end of it all. Of course, if you make more than $40,000 a year you'll be better off in the end but it'll take the SAME EXACT AMOUNT OF TIME.
Let's say you're better than that! You want to expand your means but still maintain a 5% yearly return, ending at age 62 (40 years of working) and making the same amount of money as you made before. So instead of saving half to end in a lump sum, you want to open a brokerage account. You're pretty good at this investing stuff, so you know you can get a 5% return every single year. You're going to use a tax shelter to make sure you get every penny you can, too.
If you're somehow savvy enough to get that return consistently for forty years, and you're willing to put half of your first month's paycheck, you'll have to save $6622.53 yearly (assuming the same scenario above, $40,000 a year for life). With that initial deposit, you could start a Fastlane business, no joke! This corollary IS dependent on your initial deposit, so if you can spare more money, you'll be better off at the end. However, the time remains the same and so does the expectation of living on the same money you did before.
Essentially, over those forty years, without accounting for inflation (when your gallon/4L bag of milk will be $12.00, gas will be $14/gallon and your car will be depreciating fast) you'll have saved about 16% of your paycheck just to live frugally, work 9-5 and watch your dreams wither away. And, no, you won't get that Lamborghini or that house in the islands.
Oh, and that promotion you get won't help much, either.
Does THAT math sound appeal to you?! It shouldn't.
*Note, if the math is wrong, tell me so I can change it, The message won't change.
EDIT: Thanks kurtyordy for re-doing the math.
There IS a way to beat this, in the Slowlane. All you have to do is lower your means when you retire.
Yes, live off less than what you lived off of in your 40 years of working! If you do this, you CAN afford that Lamborghini... but not that house in the islands. Sorry. But if you get stuck with a nice big medical bill, then you're on your own. Live in a place with free healthcare? Great! Your outlook is still not much better.
It kinda defeats the purpose of retirement, doesn't it?
Notice I didn't even have to mention all of the other permanent sacrifices you'll have to make to live in the Slowlane. I only talked about the money. This is just the numbers.
Let's say you've just graduated from a 4 year college. Doesn't matter the profession. You've gotten a full-time position for the day after graduation, in a job that you may or may not like. You have dreams. You want to go on vacations. You want to live a certain way, with your paycheck being your only limiter. You want to live debt-free, simply within your means. You will never miss a payment in your life and you'll have a nice family in a nice neighborhood, relative to the money you make. And you want to retire at a 'reasonable' age, let's say 62, in 40 years.
You're also smarter than most: you KNOW that IRA's and mutual funds are loads of baloney. This is the year 2012 and you saw how they flopped. But you know you're somewhat savvy with the financial markets: you have the ability to get a 5% (conservative) annual return on your money at the end of it all. And let's say that despite market ups and downs, you're still able to get that 40 years from now.
Here's the kicker: you want to live the same way your entire life, making the same amount of money to the day of your death, which will be at around 72 if you're lucky.
So, let's put some numbers in here. You're making $40,000 a year. You're going to work for 40 years. You want to make $40,000 passively at the end of your working years, 5% annual return. You're going to need $800,000 nest-egg in order to do that. So, $800,000 divided by 40 is $20,000. That's half your paycheck. Now, you're paying off student loans and rent. You're gonna be eating Top Ramen and watching TV through your 15" laptop monitor.
But you're left with an extra $20,000 a year from your passive income, now that you no longer have to save it! Well, it's going to go into medical costs and, factoring in for inflation, you're going to have to live off of every penny of that $40,000 a year.
No matter how much you make, with these numbers, you will have to save HALF of your paycheck in order to get a passive return on your money of 5% annually at the end of it all. Of course, if you make more than $40,000 a year you'll be better off in the end but it'll take the SAME EXACT AMOUNT OF TIME.
Let's say you're better than that! You want to expand your means but still maintain a 5% yearly return, ending at age 62 (40 years of working) and making the same amount of money as you made before. So instead of saving half to end in a lump sum, you want to open a brokerage account. You're pretty good at this investing stuff, so you know you can get a 5% return every single year. You're going to use a tax shelter to make sure you get every penny you can, too.
If you're somehow savvy enough to get that return consistently for forty years, and you're willing to put half of your first month's paycheck, you'll have to save $6622.53 yearly (assuming the same scenario above, $40,000 a year for life). With that initial deposit, you could start a Fastlane business, no joke! This corollary IS dependent on your initial deposit, so if you can spare more money, you'll be better off at the end. However, the time remains the same and so does the expectation of living on the same money you did before.
Essentially, over those forty years, without accounting for inflation (when your gallon/4L bag of milk will be $12.00, gas will be $14/gallon and your car will be depreciating fast) you'll have saved about 16% of your paycheck just to live frugally, work 9-5 and watch your dreams wither away. And, no, you won't get that Lamborghini or that house in the islands.
Oh, and that promotion you get won't help much, either.
Does THAT math sound appeal to you?! It shouldn't.
*Note, if the math is wrong, tell me so I can change it, The message won't change.
EDIT: Thanks kurtyordy for re-doing the math.
There IS a way to beat this, in the Slowlane. All you have to do is lower your means when you retire.
Yes, live off less than what you lived off of in your 40 years of working! If you do this, you CAN afford that Lamborghini... but not that house in the islands. Sorry. But if you get stuck with a nice big medical bill, then you're on your own. Live in a place with free healthcare? Great! Your outlook is still not much better.
It kinda defeats the purpose of retirement, doesn't it?
Notice I didn't even have to mention all of the other permanent sacrifices you'll have to make to live in the Slowlane. I only talked about the money. This is just the numbers.
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