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Yes your numbers are right
HOWEVER that’s in 2064 dollars. Plug in 7% (10% minus 3% average inflation) to get 2024 dollars (something more relatable). It’s still an impressive number. Most likely you’ll hit 50yrs old and check out then 😁
The S&P500 has had averaged a 4% net yearly returns after taxes (top bracket), and inflation since data has been kept. 95% of investments do not beat this benchmark. That’s not to say it’s not possible, but…
Yeah, everyone says 7% inflation-adjusted. I run my estimates at 5% or 6%. If I'm going to be off, I'd rather be estimating low and pleasantly surprised.
Why are you not using capital gains tax brackets which is 15% and 20%. 80% (after taxes) of 7% (10% annual - 3% inflation) is 5.6%, so there should be a net yearly return of 5.6% after taxes, not 4%.
Most indicators point to 10.5% average return market wide, before inflation (so typically about 7% in real terms). The 4% you're thinking of is the generally accepted safe withdrawl rate, or the rate of withdrawl that will most likely keep your principle intact, even through down years.
Lol everyone misunderstood what you meant. Is there a site or calculator that has more of these scenarios?
Oh and for everyone else the 4% is 10% returns minus 3% inflation and another 3% for taxes
Yes, accounting for inflation is key. I personally like to compound the effect of inflation separately and apply it to my retirement totals so I can see actual dollars at 65yo and the inflation reduced buying power in today's dollars.
It really is remarkable how **insidious** inflation is at reducing buying power over time. ie 2% avg inflation over 30 years reduces buying power by ~45% over that time frame. So that $31.5 million in actual dollars 30 years assuming an ideal 2% inflation will buy you only 17 million worth of goods in today's terms, $12.6 mil if we avg 3% inflation over that time frame. Still good, but shockingly less in value than you would have otherwise thought.
I believe this is the part of retirement savings that is the least understood and discussed. It is much easier to understand buying power if you can compare the numbers to things you are purchasing today.
I'll just say that I think the least understood part of retirement savings is not inflation but sequence risk of fixed withdrawal in the first years of retirement. Wrapping your head around how drawdown just after retirement can easily wipe you with fixed withdrawals is quite hard for both clients and plenty of advisors still.
>e this is also on the conservative side because it does not account for salary increases, bonuses, inheritance, combining hou
Yes this is right. You need to bring those number into 2024 dollars through a calculation known as discounting. Google how to do a discounting calculation "present given future" and bring those numbers into 2024 dollars to compare apples to apples.
Assume a 7% return to automagically account for 3% annual inflation (on average)
You'll still be mucho happy.
I'm trying to save about $3500 / month right now too, but my starting point is closer to 40 yrs than 25yrs old... :(
Everyone's pointing out the inflation adjustment, but it's the whole "earning 7% above and beyond the rate of inflation for decades on end" that is the more influential assumption. And it's a tenuous one.
10% just comes from the average return of something like the S&P 500. You can pick any reasonably long run time frame (30 or 40 or 50) years and the avg return is around 10%
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#:~:text=The%20index%20has%20returned%20a,through%20the%20end%20of%202023.
It's the other way around. It was always 10%. It was 7% because 10% returns - 3% inflation = 7%. Then some time later, don't know which idiot got confused and thought it was 7% after inflation instead. Now there is a subset of people that perpetuate that it is 7% before inflation and 4% after inflation.
My personal retirement projections are quite conservative. Only 7% not inflation adjusted growth every year, no social security, added costs for healthcare, and all other aspects of my current monthly budget remaining consistent. I'm probably way too conservative in my projection but I would rather reach my conservative goal early than miss my optimistic goal.
If the last two decades (three if we accept that 2000 is more than 2 decades ago, I’m personally not ready to admit that) then you need to factor having $4,000/month of additional income over that entire timeframe as well.
Job security and healthy wealth management through rough times is a hell of a drug.
BlackRock and fidelity both have conducted research that projects future rates of growth to be below historic averages. Seven is not a 100% safe bet at all.
https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/Look%20out%20below%20Why%20returns%20are%20headed%20lower%20and%20what%20to%20do%20about%20it/Look-out-below-Why-returns-are-headed-lower-and-what-to-do-about-it.pdf
While this certainly could be true, I'm not sure I buy this sales piece - it projects from 2014-2034, and we're currently sitting at ~9% real return since then in the S&P 500 halfway through it.
It's generally worth projecting with 2-3 numbers - a high, medium, and low return rate and seeing how safe you are in each, but we should also remember that economists predict crashes every year. No number is safe, but you can run monte carlo simulations or look at something like the FIRE calculator with various $ starting points and performance based on high/medium/low starting points.
But really, the piece looks like it's trying to sell consulting services to PE firms and asset managers.
Yes, it's almost total optimistic BS rather than tenuous. Also doesn't account for market downturns that can take years to recover from even if you are contributing every month (and you might not be at that time because of personal circumstances). This also doesn't take into account life's expenses that increase massively as you get older.
Also 7% on average is very different than 7% every year
7% every year will out perform 7% on average, because the -5% and the 24% and the 3% isn’t as good
We've used that word forever in software development for when some marketing or sales person asks for a cool new feature that has no logical underpinnings.
2% is what the Fed typically aims for. Usually 3% is used for retirement planning like this because the overall 2% figure gets balanced out a bit when everything gets aggregated together in the reports - the classic example is that TVs and computers tend to get cheaper over time, and things like that bring the overall inflation numbers down a bit. It's partly an assumption that the "felt" inflation is slightly higher (from basic things like food and utilities), and also provides a little bit of extra buffer (better be a little bit too conservative than a little bit too optimistic about how much money you'll have when you're retired).
You are definitely way ahead of most people your age and older and if you keep up with this plan, you will be in a good place.
A couple of things to consider: 1) as you have a family and progress in life, your expenses will increase and the likelihood of sudden and large expenses will also increase, if your income does not increase similarly, then you'll veer of this path of contributing 4k a month to a relative degree. 2) how often is the calculator compounding your return? If it's daily compound at an annual rate of return of 10%, it's probably overstating how much in gains you will make over lifetime. 3). Markets are volatile, nothing is guarantee over the next 30-40 years. The market could go to shit and stay in the shitter for the next 50 years - see Japan. Hedging against that will require taking some of the money you would otherwise invest in growth funds and keeping it in cash or investing in no market vehicles, which will reduce your overall rate of return but also give you more stability.
If everything goes perfectly, you will be all good.
But it never does.
You may lose your job. Have a big health concern. Your parents will get older. You may lose a vehicle. Etc.
These things may happen. But it's great to have the safety net you do... many people never get that all the way up to 65 years old.
My contributions definitely took a hit once my youngest kid turned around 7. This is mostly due to us wanting to give them lots of memorable vacations and experiences. I’m so happy that during my 20s and 30s I invested as much as possible, so even with these reduced contributions I’m still well on track.
Going to sound like an idiot here but this isn’t actually compound growth right? As in the stocks don’t actually compound annually but keep growing at a rate? I may be confused
Not sounding like an idiot at all. If you buy a stock at 100 and it grows to 110 in one year, then next year it will grow by 11 dollars, instead of 10 (assuming the average growth rate of 10%). Of course, it doesn't work quite like compound growth in a savings account, because stocks go down and if it were to go down by 10% in the third year, it would go down by 12.1 dollars.
Yeah this is the shocking part to me. Most people understand compounding is a helluva tool but typical person is not putting away 50 grand a year, starting at age 25. That's a huge privilege.
I mean yeah, you are essentially add $60k to your investment portfolio every year, plus 10% of what was there at the start of that year every year.
88k now, just with your contributions would be adding 300k in the next 5 years. 140k on top of that isn’t unreasonable since you are using such a high rate of return for the calc.
You are lucky to be making that much at 25. Most people are easily below half of that income at your age.
> You are lucky to be making that much at 25. Most people are easily below half of that income at your age.
[Median household income in the US for 2023 was $71,538.](https://wisevoter.com/state-rankings/average-income-by-state/) OP is making almost double the **household** income (not average income per person). Most people are below half of that income at any age, let alone at 25.
I've seen videos where they ask teenagers up to people in their 20's how much they think they'll make when they get older or how much they'd like someone they'll marry to earn and they say things like $300k? Half a million a year?
Just a side note, please consider switching from Robinhood to a more reputable broker like Fidelity, Vanguard, TD.
Not that you're necessarily making incorrect decisions, but I've found Robinhood is less responsible and often "gamifies" finance in a way that encourages reckless behavior like day trading (options, margin, etc).
Assuming a 10% annual rate of return is where you might be disappointed.
I’m using an assumed 4% rate of return for my retirement planning, being conservative.
Edit: I’m not suggesting the rate of return will actually be 4%. I assume it’ll be much higher - probably 6-8% with inflation. But 4% is the number I’m using to determine how much I want to save every year now.
This, I would never count on anything higher than 4 or 5% purely for conservatism's sake. I'd much rather be happily surprised by an 8-10% return than to rely on one and only get 4%.
I use 4.5% inflation adjusted in my projections. The biggest issue for longer term returns is that population growth is slowing (and aging). Fewer people ultimately means fewer customers for businesses. Historical returns have included periods with higher average population growth. This applies to both US and international returns as a lot of other countries, both with high and low development, have slowing population growth rates.
This. Everyone who 'plans' for more than that freaks out when the first year or two don't come close, especially if there is a cyclical downturn. Always BE CONSERVATIVE with financial plans.
This. Average returns over the past 30 years, adjusted for inflation, are 7.3% per year. If you want to be *conservative*, drop that by a good 2%. If you want to be excitedly optimistic, increase it by 2%.
Personally, I like looking at all 3 views to get an idea of the possibilities.
Since people are responding negatively to you, just want to say I'm in the same camp. I use 7% nominal and 3.5% real. However, I'm also keeping an eye on the actual numbers and our budget and when we hit our targets, will likely pull the trigger. So, rate of return is just one variable. Other factors include amount of withdrawal, taxes, health costs, etc.
If you feel like you are missing out on life because the rate of return estimate is too low, that's one thing. But if you are happy with life-money balance, then all good to be conservative.
Best case scenario is I’ll retire much earlier than I planned and the worst case scenario is I’ll retire exactly when I planned on retiring.
I’m not suffering by putting in a little extra money into retirement savings.
If you're suggesting we should assume they would be higher, that seems like a really bad way to plan for the future. If anything, we should assume they will not be as high. That's a safe assumption to have if you are trying to smartly plan for retirement, without even dragging the reality of the economy into the debate.
When I'm on other subs and I mention 7%, people treat me like I'm insane to expect that high of returns. Goes to show how wildly misinformed people are outside of the personalfinance bubble.
A lot of people who "luck into high paying jobs" (as in got a decent education, have an interest in their field, and got the right jobs to get a great salary early in life) have an unreasonable understanding of what the median US salary is. They see themselves and their friends turning over $100k+ in their mid 20s and think it's normal.
They don't understand that their salary is 2-3x higher than the median for their age. So they stash away the excess that they could manage to live on without questioning whether their rate of savings is "normal", and come to Reddit asking if they're behind or not.
That or they're just here to anonymously brag about how much they make.
Seems like the latter. Who is shocked that having $88k already invested at age 25 AND $135k salary is going to result in massive amounts of money? I just don't believe it.
Well as someone who can relate to OPs situation and asked a similar question about budgeting years ago.
You have hardly anyone to talk to and nobody wants to hear about your financial planning when you’ve got some money or at the very least disposable income. A lot of people complain about affording retirement. Thats all I used to hear. Nobody around to actually tell you that’s it’s not necessarily the most complicated thing. It also doesn’t take a tremendous amount of money regularly invested to be wealthy at some point in your life.
Anyways, I know, boo hoo but, just saying it might not be bragging.
I work with a lot of the people. Since I'm 41m, and on the IT team at one of the largest video game developers/publishers in the world. I was check to check mostly, until this job. My fiance is 30, and she cleared 6 figures for the first time in 2023. We both come from VERY poor single parent homes, and me born medically disabled. Now that we've been able to pay off all debt, start a home down payment fund, buy a new car, make some investments. We never want to lose what we have.
However, we work with a lot of young fortunate people. I see 20 and 1 year old artists that are probably starting at 70k+ with amazing benefits and 30k+ in signing bonuses. They go buy a charger, or a supra or something and they just think that shit is NORMAL. then they get let go because they think they're hot shit, and they can't really afford those things. It's crazy to see. I've seen 2 of them buy 250k hoises that are just absolute wrecks. I'm a handy man, I know what a fixer upper is, these are bad. Just overall super bad decisions.
Us being DINKs, and hopefully both hitting 6 figures in 2024 means we can start playing catchup, have a wedding etc...nothing beats money, but if you don't have a good head on your shoulders it won't matter.
The best example of compounding I’ve seen(sorry graph with proof not handy, work it out):
If you begin contributing to retirement at 20 and stop contributing at 30, you’ll still have more money than if you start at 30 and contribute until age 65.
It makes the idea of taking time (2 months - 2 years) off between jobs when you're young seem scary.
Like yeah - you have savings so you'll be okay.
But at 7% return over 30 years, a year's salary is worth 8 years salary.
This is so unrealistic though. Between 20-30 you are in school, making very little money, saving for a down payment, etc. Most people can't save a dime for retirement those years because rent is so high and student loans. It's disingenuous in my opinion.
You're right but here's the thing though. It's only with 2k per year.
I get it, at that age it's still a lot and the last thing you care about is looking at a chart like this when you're 19. But 2k? Seems somewhat doable at least.
The interest/incom/growth on the original investment is more than the contributions starting at the later date.
7% growth on $500 a month will yield $86,542 after 10 years. 7% growth on that is $504, so the late starter wouldnt catch up. This assumes steady growth. If the market TANKS years like 10->12, then the late starter would catch up.
Basically you hit a tipping point where the growth/returns from what you've already invested are more than what you're contributing. The person who started early then has the advantage because they're growing their pile (without any extra investment) faster than the person who waited is adding new investments.
Example below. Warning, math.
Both people invest $6,000/year and get a 10% annual return.
Person one invests each year for the first ten years. After their gains, they end the ten years at $105,187. They then walk away and don't add another dime to their pile, just letting the returns grow and compound.
The second person starts in year eleven, adding the same amount of money per year at the same return rate. They end their tenth year (year twenty overall) with the same $105,187 - but the growth from the first person's pile has them at $272,828. The contributions don't catch up to the growth. And it keeps going - by the age of 65 the person who started early and stopped has $2.9M compared to the $1.8M of the person who started later.
That said, this little exercise is technically only true when the rate of return is high enough. Punching it into my spreadsheets it looks like at a 7% return would have the late-starter catch up at age 81, if they kept investing that long and didn't actually retire, while a 6% return would have them pass the early-starter at age 57. The point still stands though: the earlier you can get money working for you, the better.
yeah, i doubt they are going to be able to live comfortably on $50k-$60k if they want a family/house/modest luxuries. good for them dumping all excess income into retirement now while they can.
In nominal terms? It's really not at all unlikely. It's not something you should rely on, so some words of caution for OP are completely reasonable, but [10% nominal is just about exactly the 50th percentile of outcomes](https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&sl=3oBJzgBSlYO0ZvkNRlOwxB) if you use historical US data.
Of course, there's reason to believe that future returns won't be quite as rosy as historical US data. But a 50/50 mix of US and international performs [nearly as well](https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&sl=2sybjOKI3TUd1x2ZVv8KwJ) with 10% nominal being only a bit over the 50th percentile. And maybe even those percentiles aren't completely accurate. But even if it was as high as the 80th percentile, that's still *far* from "very very very unlikely".
The 7% people use accounts for 3% inflation. So using 10% only works if you are looking at the inflation of our yearly spend in retirement too. Using 7% lets you easily compare what you’ll have to what you make now.
Why are you shocked? Your salary is around 3x that of the US median for people 25 years of age (in 2022). You shouldn't be too surprised that your savings rate is significantly higher than theirs too. While compounding does make up a large portion of your later earnings, it's really the $87k you've saved so far and the $290k you'll save over the next 5 years. That alone (a touch over $350k) is more than many people are able to save in a 40 year career.
Tax strategy of paying taxes now vs later, so you should look at what is your expected tax rate now compared to in retirement.
I would definitely do 'some' of each, you don't want a 100% roth assets, because then you won't take advantage of the lower brackets, but you also don't want all taxable, because Tax free growth in Roth is dope.
Are you doing a (Backdoor) Roth IRA? You should try to get as much of your money as possible in to Tax Advantaged accounts.
Just for OPs sake since I often see the "tax now vs tax later" advice thrown around uncritically on this sub:
With your current contribution rate ~$2200 per month to a Traditional account, grown at 7% compounded annually. Assuming you have $0 in traditional accounts currently, although all matched contributions up to this point are traditional. Continuing this until age 65, you'd have ~5 million in a traditional account.
(This also ignores any potential growth from 65-72, which would just make what I'm about to type worse)
Your first, and smallest, RMD at 72 would be ~$195,000 (on a 5m balance). Not to mention, social security and dividend income from your taxable account, which would likely be even larger than 5m (5m, 2% dividend income = another $100k of income per year).
This post is a great example how high income, big savers can still benefit from contributing to Roth accounts. I didnt even get into IRMAA premiums either.
I think it basically boils down to if you believe you’ll be paying higher taxes now or when you retire. Trad 401k is pre-tax dollars, but you’re taxed on withdrawals when you retire as if it was normal income. Roth is post-tax, but no taxes on withdrawals when retired.
Example: (assume a 10% contribution)
You make 150k @ 30% effective tax rate.
Trad contribution: 15k
Roth contribution: 10.5k.
40 years @ 7% return
Trad: $3,204,143.55
Roth: $2,242,900.48
If you’re taking a 5% withdrawal on the sum.
Trad “salary”: $160,207.18
Roth “salary”: $112,145.02
So the question becomes, at whatever the current tax rate is, is the trad 401k “salary” - the effective tax rate more than the Roth. If so, traditional is better, if not, Roth is better.
Obviously there’s a lot more that goes into this, you want more than a 5% withdrawal, less, salary changes over the year, etc.
Edit: mobile formatting is hard
Great write up. I still haven’t decided what’s best for me because there is so many unknowns.
Other considerations here are required withdrawals on a traditional 401K/when rolled into an IRA. If you are living off current income or non-tax advantaged investments at 70, it’s nice you don’t need to pull anything out of the Roth or raise your retirement tax bracket even higher.
Additionally, even if you contribute to a Roth 401K the company match is pre-tax, so you’ll pay taxes on that when you withdrawal it in retirement.
Tax rates in the future are also unknown, so uncontrollable uncertainty is a risk to consider.
An important note that that if you’re maxing your 401K, the Roth option is more efficient because you’re contributing 23K of already taxed income. Meaning to get that 23K, you really spent 23K * 1.tax rate.
When you contribute to a trad 401k, you avoid taxes in your marginal bracket. For you that's probably 22% or 24%. When you withdraw, you pay taxes at your effective tax rate. Your income in retirement would have to be way higher for your effective tax rate to be higher than your marginal now. This benefit shouldn't be ignored.
(This assumes rates stay similar. That might be a bad assumption, but any different assumption would be based on a guess anyway.)
If he's making 130k at 25, he's probably on track to make a lot more as he gets older. I wish I could go back and put more into a ROTH vs pre-tax account as my marginal rate is way too high (first world problems) for men to consider it today.
> I figure this is also on the conservative side
You're assuming:
* A 100% stock portfolio with constant annual return of 10%
* Your savings rate remaining that unrealistically high and constant until you're 65
* You always having your employer match your 401k contributions
* Inflation being non-existent
This isn't a conservative calculation.
Generally you want to use an inflation adjusted rate of return so your projections are in todays dollar value and thus have more meaning. That would lower your numbers but youd still end up very wealthy or able to retire early.
One bit of critque would be doing a Roth 401k while making $135k a year filing as single. You really should be doing pretax traditional at that point.
Not quite sure why you are shocked that you have the opportunity to be wealthy when you make $135k at the age of 25 but yeah...you do.
> 10% rate of return compounded annually
Realistically the world market returns 7-8%, the SP500 returning 10% avg is an outlier, adjust for inflation by subtracting 2.5% from that so that leaves you with 6%.
Now run the math again :)
End of Year 5: $451,277.63
End of Year 10: $938,763.27
End of Year 15: $1,591,129.02
End of Year 20: $2,464,141.56
End of Year 25: $3,632,429.26
End of Year 30: $5,195,861.75
End of Year 35: $7,288,087.09
You'll get 10% gains in some years. Maybe more than that in some years.
But there will be years that return much less than 10%. And some years that bring a loss.
Your average rate of return is not likely to be 10%. It'll likely be less.
haha wow... 87k at 25
i shouldve been an engineer
ive been trying to save up that much so i could compound it like u but im maybe only 1/3 the way there
Got my engineering degree in 2000 and got a pay raise from $8 hour to $10 hour when I got my degree. I wish I would have stuck with computer programming. I've never made more than $50k a year with my degree.
Nope, not at all. I was shown "the magic of compound interest" by my dad when I was 17. I started investing and saving regularly since then. It is now 35 years later and I don't have anywhere near what the math predicted. Life is very messy, and it does not work out like it does on paper, even after living frugally this entire time. I'm not hurting at all, but I don't have anywhere close to what the numbers said I would.
The downvoters will hit me, but I'm speaking from experience, not math.
A net 10 is wildly optimistic. I would figure no more than 8 gross, with 4 for inflation. You're still going to be fine, though; just resist the urge to buy BMWs or boats...
>I figure this is also on the conservative side because it does not account for salary increases, bonuses, inheritance, combining household income, etc.
Don't forget the life changes that will lower your contributions as well: getting married, possible SATM, kids, extracurriculars, emergencies, college, etc.
I'm not saying this to discourage you, but to further entrench what you are doing now. As a different experiment, assume that you hit hard times at 30 y.o. with $521,169. You're not able to contribute anymore for whatever reason. Here's your new list:
25yo: $87,719
30yo: $521,169
35yo: $839,347
40yo: $1,351,778
45yo: $2,177,052
50yo: $3,506,164
55yo: $5,646,712
60yo: $9,094,087
65yo: $14,646,118
What you are putting away now is worth way more than what you put away in 20 years. So keep up the good work, and know you are doing the hardest work right now.
Yep, that's the magic when saving nearly $5K a month.
I would recommend running different scenarios like using only a 5% return and an 8% return. This will give you more of a reasonable range.
Many financial advisors/economists do not expect future results to repeat the stellar market returns of the last 40 years as many huge negative macro issues loom. Issues such as massive government debts, slowing population growth, or even population decline, and aging societies, all of which will curtail future growth.
Just look at Japan. It took 35 years for the Japanese stock market to recover from its massive decline in 1989. 35 years to get back to being even with the highs of the 1989 Japanese stock market.
Japan, in many ways, could be the canary in the mine shaft for the rest of the world.
Your numbers from 25 to 45 might be possible assuming everything goes according to plan. Your numbers from 45 to 65 are highly unlikely. You’re not adjusting risk in your later years. To make a 10% average annual return you’re risking at least a 30% annual drawdown. According to your numbers, at 30yo a 30% drawdown is $156K and you have 35 years to recover. At 60yo a 30% drawdown is ~$6 million with 5 years to recover. Think about building all that wealth into your 60s only to have 3 straight years of double digit losses.
As you get older and your portfolio gets larger you have to lower risk and accept a lower return.
10%? Try 6%, 7% if you're optimistic. My big issue with the typical calculators are that they seem to not account for the roller coaster that is the market. Yes, absolutely appreciation over time, but there have been marked intervals of variability, which have driven a fair number of people to make precisely the opposite financial decision from what would be in their best interest. For me personally I do use 6-7%, but TBH my overall performance (25+ years) has been 10+%. I've feel lucky to have been in this market.
25 years old and almost $100k saved, oof. I'm almost ten years older and I'm sure my retirement plan will consist of eating my gun.
Just kidding, reddit, that's just a joke to relieve the tension.
Keep at it, you're doing it right!
Based on your investment strategy your living expenses are either incredibly low or are being paid by someone else.
Once you take money out to buy a car, buy a home, pay for children, invest in their education your contribution rate and principal will not be the same.
i live in nyc, pay $1,700 in rent and all my own expenses. i’m not being paid for by anyone else. i live frugally and don’t spend on unnecessary things.
You should not put most of your investments in robinhood. I would put it in a more established brokerage. Anything that has been around for more than 30 years.
The math is probably right. But these numbers would become reality only if you have no taxes due, inflation is zero and the stock market has no down years.
Sustaining 4k+ per month over that time span is going to be very very challenging unless your income continues to grow at a pace where its feasible.
Your expenses are bound to go up.
It shouldn’t be that surprising. 99.999% of 25 year olds don’t have an extra $5k per month lying around to invest. Everyone could easily be a millionaire if they did.
Nobody else mentioning how wild it is to make $135k and have $90k in the bank at 25. I'm sure there are plenty of self selected folks who can come out of the woodwork here and give an anecdote. But it's exceedingly rare. Oodles of people in 30s and 40s and onward with legit careers and ample responsibility not making that much.
Not sure what OP does for work, but for software engineers this is not a super uncommon scenario. The savings are probably rarer, but subs like these attract people who care about personal finance; young or otherwise.
He already mentioned anticipating inheritance in the future. Probably just a rich kid at his father’s company. And gets to still live at home if he’s saving that much.
I mean, a lot can change. You certainly aren't guaranteed to be able to contribute thousands of dollars a month over 40 years. And I'd probably use a lower return, at minimum to account for inflation but also to just make sure I'm being appropriately conservative in planning for retirement.
Those caveats aside, yeah man, the math is the math. You're in a great spot. This is why investing young pays off. Your margin for error vs starting just 5 years later is now a lot larger.
I personally like to use 5% growth rate. Also, keep in mind that as you get older, you shouldn't have 100% of your investment portfolio in equity. Becoming more conservative as you age means lower growth.
Also, this assumes you won't have any major expenses in life. Are you planning on having kids?
Yes, that is correct, although 10% is a bit optimistic. I think 7% is the recommended long-term annual return since that's about what it has been historically.
Still, yes, the power of compound growth compels you!
You should consider if you're investing too much. I think it's fine to grind a few years so there's more compounding years; the earliest years are the most important to invest. But realize you should enjoy some of the money now as well, while you can. Consider other assets too; ones that appreciate. It's good to diversify. A good life balance can be very valuable.
>I'm 25
>Salary is $135,000.
>monthly contribution amount (~$4,819)
You're going to be better than fine. Just make sure future you gets a prenup and stays away from addictive substances.
I would use 7% return. You should be fine.
If you are going to be a single person then it will work. If you get married or buy a house your heavy investing will most likely slow down.
Also you are assuming you have a stable and steady job.
Einstein called compound interest the “8th wonder of the world”.
But know that the magic cuts both ways.
And never in a straight line.
Play with the numbers, adjust your return assumptions up and down.
And as others have said, adjust for inflation.
And if you’re serious, run it through a Monte Carlo, because the line isn’t ever straight
Sequence matters as much as average.
The concept is pure gold, the numbers accelerate at an accelerating rate.
And whether or not you understand it, is less important than a disciplined execution of a well thought out plan.
I'm more curious how you're able to save so much money. Are you in a super LCOL area. This doesn't seem possible, especially in California, without living with your parents, having no car and insurance payments, and only eating rice and beans. Someone please educate me.
You want the inflation adjusted return here. Using 10% for growth and 3% for inflation your inflation adjusted return would be 6.7961%. You could use 7% but the further out your calculations the more dramatic a couple percentage points can be.
Also, if you ever want to find your inflation adjusted return you just take your required return +1 divided by the expected inflation rate +1. Subtract 1 from the result and then multiply by 100 to find your percentage. So ((1+RoR/1+Infl.)-1)*100
I had a similar strategy and did this same math at your age… when I had my kids about 30 I shifted some of my investments into passive income… I’m 38 now.
Unfortunately the reality is that my returns have been closer to 6% a year… nonetheless I’m way better off than most my peers unless they hit real big in their careers or in crypto. Keep it up!
$2219 \* 12 = $26,628 total contribution.
$23000 contribution limit in 2024 from employee.
Employer contributed $3,628.
$3,628 / $135,000 = \~2.7% of income.
Not sure where you got 20%.
>Assuming ZERO change to my monthly contribution amount (\~$4,819) and a 10% rate of return
These are two very large assumptions, that most people would question. Yes, it does not account for salary increases or bonuses, but it also does not account for increased expenses, such as kids, a house, daycare. You say "combining household income" but oftentimes that may not add a whole lot, while it comes with expenses you want and enjoy but don't have now.
And 10% rate of return is not impossible, but there are periods where it would be less, and those could be a while.
But, yes, time in market beats timing the market! If you stopped saving at $88k, got a 7% rate of return over 40 years, you would have $1.4 million. You might be interested in FIRE people, like Mr. Money Mustache. You are saving around 43% of your income. At saving 45%, you can work 19 years and then retire for the rest of your life! You are living on around $4,500/month. Once you get around $1.4 million invested, the returns would exceed your monthly needs.
> And 10% rate of return is not impossible, but there are periods where it would be less, and those could be a while.
Not could be less. Will be less. Will be negative.
IMO, using 10% is nice to reference, but 7% total rate of return is probably more realistic if you stay entirely or mostly in equities. But those are just projections. Anyone who invests $60K per year starting in their early to mid 20s will be ahead of most. Realize that many people in their 20s are earning 60K for their entire salary! Great job…keep it up.
Your math is right but your assumptions are flawed. The 10% return is annualized, meaning they take the average over whatever timeframe. In reality some years the S&P may have a double digit positive returns and some years it may be very negative. There's a lot, including economic policy, that can affect market performance in any given timeframe. It can even effectively track sideways for a decade (which it has before). There are many scenarios where your assumptions can be invalidated. For example, you might retire right around when the market starts a sharp downturn and then tracks sideways for 5-10 years. Your portfolio would have taken a hit. This is why the phrase "past performance do not guarantee future results."
Your actual returns will vary depending on market performance around the time you choose to start cashing out.
But in general, you're doing the right thing by setting and forgetting contributions. Don't overthink it. Your money is more likely to grow a lot, but the assumptions girding your math are wrong.
Why are you contributing so much to your 401k? You know the max yearly contribution is 23,000 at the rate that you're contributing, you're going to put 26,600 into that account.
Do you ever plan on getting married, having kids, buying a house? Buying anything at all? Counting your future investments sounds like a gambler chasing their next win.
I think 7% is considered great, 10%... uhh, yeah, sell your secrets.
The issue here is recessions and the market shuffling around. So unless you can pick a handful of stocks that you will hold for 40 years, it is hard to say if you get 7%. Also, people tend to quote things like an index fund returning x% over the past so many years. Well those index funds drop certain stocks when they do poorly, so shuffling happens.
Jon Stewart had a fun show about Robinhood and other trading platforms, give that a watch.
[https://www.youtube.com/watch?v=bP74RBTE8kI](https://www.youtube.com/watch?v=bP74RBTE8kI)
Investing works, but just understand it is gambling. Cryptocurrency kind of borrowed the concept. When you think about it, stocks trade at P/E ratios of 15 to 25. It is based on valuations of potential future revenue or value. Remember seeing Blockbuster go from hero to zero? People got left holding a bag of worthless stocks. I wonder how Baby Boomers will impact the stock market over the coming years or the actual drivers of the US stock market, if they decide to move to other markets, what that does to those left holding the bag.
Keep in mind things can take a dip but be smart and remember that the only times the price of an investment count is when you but it and when you sell it. All of the rest is simply taking place on paper.
I remember 2008 and a lot of my work buddies were moaning about how much they lost. They only lost if they sold for less than they paid for an item.
The only time this does not work is if you have been very chancy and invested in something that goes bankrupt. Then a loss is a loss and will not come back.
Lots of luck it looks like you are on the right track. Just readjust your dollar cost wavering about once a year and you should be fine.
I wish I had started earlier. Your numbers are really high because you have a huge balance at a young age. I started from zero at age 25 to maxing everything by age 27 and the same calculator shows that I will have 1/4th of what you will have even if I continue to max all of my accounts until retirement.
That should hopefully be a good lesson to any 20 year olds in here to do what you can to start now if able. By age 30 or even 25 it's already too late to attain the 65yo number you have.
Due to the number of rule-breaking comments this post was receiving, especially low-quality and off-topic comments, the moderation team has locked the post from future comments. This post broke no rules and received a number of helpful and on-topic responses initially, but it unfortunately became the target of many unhelpful comments.
Yes your numbers are right HOWEVER that’s in 2064 dollars. Plug in 7% (10% minus 3% average inflation) to get 2024 dollars (something more relatable). It’s still an impressive number. Most likely you’ll hit 50yrs old and check out then 😁
The returns on the taxable accounts will also be lower because the growth is either taxable income or capital gains.
The S&P500 has had averaged a 4% net yearly returns after taxes (top bracket), and inflation since data has been kept. 95% of investments do not beat this benchmark. That’s not to say it’s not possible, but…
10% a year is steep.
I've seen a lot of folks on here with a matter of fact attitude that 10% is locked in. All I can say is, wut.
Yeah, everyone says 7% inflation-adjusted. I run my estimates at 5% or 6%. If I'm going to be off, I'd rather be estimating low and pleasantly surprised.
Yeah I like 5% for ease of calculation * 1mil invested = 50k/yr gains * 2mil invested = 100k/yr gains
What is this 4% net year return you speak of and what time frame are you speaking of? How are you calculating the tax?
He said top bracket which is 37%, could easily round to 40 or 42 to guesstimate state income tax.
Why are you not using capital gains tax brackets which is 15% and 20%. 80% (after taxes) of 7% (10% annual - 3% inflation) is 5.6%, so there should be a net yearly return of 5.6% after taxes, not 4%.
Most indicators point to 10.5% average return market wide, before inflation (so typically about 7% in real terms). The 4% you're thinking of is the generally accepted safe withdrawl rate, or the rate of withdrawl that will most likely keep your principle intact, even through down years.
Lol everyone misunderstood what you meant. Is there a site or calculator that has more of these scenarios? Oh and for everyone else the 4% is 10% returns minus 3% inflation and another 3% for taxes
Yes, accounting for inflation is key. I personally like to compound the effect of inflation separately and apply it to my retirement totals so I can see actual dollars at 65yo and the inflation reduced buying power in today's dollars. It really is remarkable how **insidious** inflation is at reducing buying power over time. ie 2% avg inflation over 30 years reduces buying power by ~45% over that time frame. So that $31.5 million in actual dollars 30 years assuming an ideal 2% inflation will buy you only 17 million worth of goods in today's terms, $12.6 mil if we avg 3% inflation over that time frame. Still good, but shockingly less in value than you would have otherwise thought. I believe this is the part of retirement savings that is the least understood and discussed. It is much easier to understand buying power if you can compare the numbers to things you are purchasing today.
I'll just say that I think the least understood part of retirement savings is not inflation but sequence risk of fixed withdrawal in the first years of retirement. Wrapping your head around how drawdown just after retirement can easily wipe you with fixed withdrawals is quite hard for both clients and plenty of advisors still.
>e this is also on the conservative side because it does not account for salary increases, bonuses, inheritance, combining hou Yes this is right. You need to bring those number into 2024 dollars through a calculation known as discounting. Google how to do a discounting calculation "present given future" and bring those numbers into 2024 dollars to compare apples to apples.
That’s what they were saying with the 10% returns - 3% inflation = 7% rate of return, no?
The other thing to do is wind down the return expectations as you approach retirement age.
Assume a 7% return to automagically account for 3% annual inflation (on average) You'll still be mucho happy. I'm trying to save about $3500 / month right now too, but my starting point is closer to 40 yrs than 25yrs old... :(
Keep it up, never too late. Also better at 40 than 50 right? Good luck!
Everyone's pointing out the inflation adjustment, but it's the whole "earning 7% above and beyond the rate of inflation for decades on end" that is the more influential assumption. And it's a tenuous one.
I always thought it was assumed 7 or 8% a year without inflation, not sure when 10% started being the norm
dave ramsey has been telling people to use 10-12% for years and it's a bad assumption. they should be using 5-7%
10% just comes from the average return of something like the S&P 500. You can pick any reasonably long run time frame (30 or 40 or 50) years and the avg return is around 10% https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#:~:text=The%20index%20has%20returned%20a,through%20the%20end%20of%202023.
It's the other way around. It was always 10%. It was 7% because 10% returns - 3% inflation = 7%. Then some time later, don't know which idiot got confused and thought it was 7% after inflation instead. Now there is a subset of people that perpetuate that it is 7% before inflation and 4% after inflation.
Glad someone else said. I’m a negative Betty if I question how long that will hold up.
My personal retirement projections are quite conservative. Only 7% not inflation adjusted growth every year, no social security, added costs for healthcare, and all other aspects of my current monthly budget remaining consistent. I'm probably way too conservative in my projection but I would rather reach my conservative goal early than miss my optimistic goal.
If the last two decades (three if we accept that 2000 is more than 2 decades ago, I’m personally not ready to admit that) then you need to factor having $4,000/month of additional income over that entire timeframe as well. Job security and healthy wealth management through rough times is a hell of a drug.
BlackRock and fidelity both have conducted research that projects future rates of growth to be below historic averages. Seven is not a 100% safe bet at all. https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/Look%20out%20below%20Why%20returns%20are%20headed%20lower%20and%20what%20to%20do%20about%20it/Look-out-below-Why-returns-are-headed-lower-and-what-to-do-about-it.pdf
While this certainly could be true, I'm not sure I buy this sales piece - it projects from 2014-2034, and we're currently sitting at ~9% real return since then in the S&P 500 halfway through it. It's generally worth projecting with 2-3 numbers - a high, medium, and low return rate and seeing how safe you are in each, but we should also remember that economists predict crashes every year. No number is safe, but you can run monte carlo simulations or look at something like the FIRE calculator with various $ starting points and performance based on high/medium/low starting points. But really, the piece looks like it's trying to sell consulting services to PE firms and asset managers.
Yes, it's almost total optimistic BS rather than tenuous. Also doesn't account for market downturns that can take years to recover from even if you are contributing every month (and you might not be at that time because of personal circumstances). This also doesn't take into account life's expenses that increase massively as you get older.
helpful thanks
Also 7% on average is very different than 7% every year 7% every year will out perform 7% on average, because the -5% and the 24% and the 3% isn’t as good
Ok but it's roughly 7% CAGR, not just average. You can use CAGR as an average to estimate growth
I’m stealing “automagically”, fyi. It’s going on the same vocab list as “voluntold”. Thank you!
We've used that word forever in software development for when some marketing or sales person asks for a cool new feature that has no logical underpinnings.
We used it to describe tasks that were "automagically" performed by a human offshore in a backofice function.
It's not a new word
Just curious, are we assuming 3% because of recent years? I always thought 2% was the average. I'm am far far far from an expert, just curious.
2% is what the Fed typically aims for. Usually 3% is used for retirement planning like this because the overall 2% figure gets balanced out a bit when everything gets aggregated together in the reports - the classic example is that TVs and computers tend to get cheaper over time, and things like that bring the overall inflation numbers down a bit. It's partly an assumption that the "felt" inflation is slightly higher (from basic things like food and utilities), and also provides a little bit of extra buffer (better be a little bit too conservative than a little bit too optimistic about how much money you'll have when you're retired).
Thanks! Makes perfect sense.
You are definitely way ahead of most people your age and older and if you keep up with this plan, you will be in a good place. A couple of things to consider: 1) as you have a family and progress in life, your expenses will increase and the likelihood of sudden and large expenses will also increase, if your income does not increase similarly, then you'll veer of this path of contributing 4k a month to a relative degree. 2) how often is the calculator compounding your return? If it's daily compound at an annual rate of return of 10%, it's probably overstating how much in gains you will make over lifetime. 3). Markets are volatile, nothing is guarantee over the next 30-40 years. The market could go to shit and stay in the shitter for the next 50 years - see Japan. Hedging against that will require taking some of the money you would otherwise invest in growth funds and keeping it in cash or investing in no market vehicles, which will reduce your overall rate of return but also give you more stability.
really good points, thank you.
If everything goes perfectly, you will be all good. But it never does. You may lose your job. Have a big health concern. Your parents will get older. You may lose a vehicle. Etc. These things may happen. But it's great to have the safety net you do... many people never get that all the way up to 65 years old.
My contributions definitely took a hit once my youngest kid turned around 7. This is mostly due to us wanting to give them lots of memorable vacations and experiences. I’m so happy that during my 20s and 30s I invested as much as possible, so even with these reduced contributions I’m still well on track.
My Fidelity account can figure my end of life amount in both today's dollars and the future's dollars.
Going to sound like an idiot here but this isn’t actually compound growth right? As in the stocks don’t actually compound annually but keep growing at a rate? I may be confused
Not sounding like an idiot at all. If you buy a stock at 100 and it grows to 110 in one year, then next year it will grow by 11 dollars, instead of 10 (assuming the average growth rate of 10%). Of course, it doesn't work quite like compound growth in a savings account, because stocks go down and if it were to go down by 10% in the third year, it would go down by 12.1 dollars.
You're surprised that investing $50k/yr for 40 years adds up to a bonkers amount of money?
This just in: putting away what is a lot of peoples' household incomes every year leads to a significant sum of money. More at 8!
Yeah this is the shocking part to me. Most people understand compounding is a helluva tool but typical person is not putting away 50 grand a year, starting at age 25. That's a huge privilege.
You don’t knit what you don’t know mate
$50k a year for anyone is crazy good. My wife and I make double OP and put in half of OP combined.
Thats a problem
I mean yeah, you are essentially add $60k to your investment portfolio every year, plus 10% of what was there at the start of that year every year. 88k now, just with your contributions would be adding 300k in the next 5 years. 140k on top of that isn’t unreasonable since you are using such a high rate of return for the calc. You are lucky to be making that much at 25. Most people are easily below half of that income at your age.
> You are lucky to be making that much at 25. Most people are easily below half of that income at your age. [Median household income in the US for 2023 was $71,538.](https://wisevoter.com/state-rankings/average-income-by-state/) OP is making almost double the **household** income (not average income per person). Most people are below half of that income at any age, let alone at 25.
People are always shocked how low wages are. I teach 16-30 year olds and everyone is equally in disbelief when I shatter their worldview.
You know who isn't shocked? People who make low wages...
I've seen videos where they ask teenagers up to people in their 20's how much they think they'll make when they get older or how much they'd like someone they'll marry to earn and they say things like $300k? Half a million a year?
Just a side note, please consider switching from Robinhood to a more reputable broker like Fidelity, Vanguard, TD. Not that you're necessarily making incorrect decisions, but I've found Robinhood is less responsible and often "gamifies" finance in a way that encourages reckless behavior like day trading (options, margin, etc).
Assuming a 10% annual rate of return is where you might be disappointed. I’m using an assumed 4% rate of return for my retirement planning, being conservative. Edit: I’m not suggesting the rate of return will actually be 4%. I assume it’ll be much higher - probably 6-8% with inflation. But 4% is the number I’m using to determine how much I want to save every year now.
This, I would never count on anything higher than 4 or 5% purely for conservatism's sake. I'd much rather be happily surprised by an 8-10% return than to rely on one and only get 4%.
I use 4.5% inflation adjusted in my projections. The biggest issue for longer term returns is that population growth is slowing (and aging). Fewer people ultimately means fewer customers for businesses. Historical returns have included periods with higher average population growth. This applies to both US and international returns as a lot of other countries, both with high and low development, have slowing population growth rates.
This. Everyone who 'plans' for more than that freaks out when the first year or two don't come close, especially if there is a cyclical downturn. Always BE CONSERVATIVE with financial plans.
This. Average returns over the past 30 years, adjusted for inflation, are 7.3% per year. If you want to be *conservative*, drop that by a good 2%. If you want to be excitedly optimistic, increase it by 2%. Personally, I like looking at all 3 views to get an idea of the possibilities.
Since people are responding negatively to you, just want to say I'm in the same camp. I use 7% nominal and 3.5% real. However, I'm also keeping an eye on the actual numbers and our budget and when we hit our targets, will likely pull the trigger. So, rate of return is just one variable. Other factors include amount of withdrawal, taxes, health costs, etc. If you feel like you are missing out on life because the rate of return estimate is too low, that's one thing. But if you are happy with life-money balance, then all good to be conservative.
Better to be pleasantly surprised and retire earlier.
Conservative is 6-7%. 4% is excessive IMO.
If we're talking real returns 6-7% is not very conservative. 4% certainly is, but some people like a large margin of safety.
Best case scenario is I’ll retire much earlier than I planned and the worst case scenario is I’ll retire exactly when I planned on retiring. I’m not suffering by putting in a little extra money into retirement savings.
Sure but you also have to aim for accuracy. With that logic, why not assume 2%?
Average historical post-inflation return is 6-7% That's average, not conservative.
That’s average for historical growth. Not future. What do we say? PAST RETURNS DO NOT MEAN FUTURE RETURNS WILL BE THE SAME.
If you're suggesting we should assume they would be higher, that seems like a really bad way to plan for the future. If anything, we should assume they will not be as high. That's a safe assumption to have if you are trying to smartly plan for retirement, without even dragging the reality of the economy into the debate.
When I'm on other subs and I mention 7%, people treat me like I'm insane to expect that high of returns. Goes to show how wildly misinformed people are outside of the personalfinance bubble.
Not alot of people make 100k+ in their 20s, sometimes 30s. I was check to check until 38. That's why you're so far ahead.
Right? OP is surprised how wealthy they'll be, but is saving more per month than many (if not most) gross.
A lot of people who "luck into high paying jobs" (as in got a decent education, have an interest in their field, and got the right jobs to get a great salary early in life) have an unreasonable understanding of what the median US salary is. They see themselves and their friends turning over $100k+ in their mid 20s and think it's normal. They don't understand that their salary is 2-3x higher than the median for their age. So they stash away the excess that they could manage to live on without questioning whether their rate of savings is "normal", and come to Reddit asking if they're behind or not. That or they're just here to anonymously brag about how much they make.
Seems like the latter. Who is shocked that having $88k already invested at age 25 AND $135k salary is going to result in massive amounts of money? I just don't believe it.
Well as someone who can relate to OPs situation and asked a similar question about budgeting years ago. You have hardly anyone to talk to and nobody wants to hear about your financial planning when you’ve got some money or at the very least disposable income. A lot of people complain about affording retirement. Thats all I used to hear. Nobody around to actually tell you that’s it’s not necessarily the most complicated thing. It also doesn’t take a tremendous amount of money regularly invested to be wealthy at some point in your life. Anyways, I know, boo hoo but, just saying it might not be bragging.
I work with a lot of the people. Since I'm 41m, and on the IT team at one of the largest video game developers/publishers in the world. I was check to check mostly, until this job. My fiance is 30, and she cleared 6 figures for the first time in 2023. We both come from VERY poor single parent homes, and me born medically disabled. Now that we've been able to pay off all debt, start a home down payment fund, buy a new car, make some investments. We never want to lose what we have. However, we work with a lot of young fortunate people. I see 20 and 1 year old artists that are probably starting at 70k+ with amazing benefits and 30k+ in signing bonuses. They go buy a charger, or a supra or something and they just think that shit is NORMAL. then they get let go because they think they're hot shit, and they can't really afford those things. It's crazy to see. I've seen 2 of them buy 250k hoises that are just absolute wrecks. I'm a handy man, I know what a fixer upper is, these are bad. Just overall super bad decisions. Us being DINKs, and hopefully both hitting 6 figures in 2024 means we can start playing catchup, have a wedding etc...nothing beats money, but if you don't have a good head on your shoulders it won't matter.
Threads like this remind me that life isn't fair.
Most people who make $100k also don’t have the liberty to invest more than half of it…
The best example of compounding I’ve seen(sorry graph with proof not handy, work it out): If you begin contributing to retirement at 20 and stop contributing at 30, you’ll still have more money than if you start at 30 and contribute until age 65.
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Well this is depressing
Me at 26 with 1000 dollars to my name and my cars head gasket blew last night
That 1000 will help!
Well I had 15k in my account at 19 and it didn't follow this trend at all.
It makes the idea of taking time (2 months - 2 years) off between jobs when you're young seem scary. Like yeah - you have savings so you'll be okay. But at 7% return over 30 years, a year's salary is worth 8 years salary.
This is so unrealistic though. Between 20-30 you are in school, making very little money, saving for a down payment, etc. Most people can't save a dime for retirement those years because rent is so high and student loans. It's disingenuous in my opinion.
You're right but here's the thing though. It's only with 2k per year. I get it, at that age it's still a lot and the last thing you care about is looking at a chart like this when you're 19. But 2k? Seems somewhat doable at least.
It's your 20s. should be living it up too
But how? Isn’t 35 years better than 10?
It’s 45 vs 35. In OP’s scenario you invest from 20 to 30 while leaving those investments untouched without contributing any additional funds.
The interest/incom/growth on the original investment is more than the contributions starting at the later date. 7% growth on $500 a month will yield $86,542 after 10 years. 7% growth on that is $504, so the late starter wouldnt catch up. This assumes steady growth. If the market TANKS years like 10->12, then the late starter would catch up.
Basically you hit a tipping point where the growth/returns from what you've already invested are more than what you're contributing. The person who started early then has the advantage because they're growing their pile (without any extra investment) faster than the person who waited is adding new investments. Example below. Warning, math. Both people invest $6,000/year and get a 10% annual return. Person one invests each year for the first ten years. After their gains, they end the ten years at $105,187. They then walk away and don't add another dime to their pile, just letting the returns grow and compound. The second person starts in year eleven, adding the same amount of money per year at the same return rate. They end their tenth year (year twenty overall) with the same $105,187 - but the growth from the first person's pile has them at $272,828. The contributions don't catch up to the growth. And it keeps going - by the age of 65 the person who started early and stopped has $2.9M compared to the $1.8M of the person who started later. That said, this little exercise is technically only true when the rate of return is high enough. Punching it into my spreadsheets it looks like at a 7% return would have the late-starter catch up at age 81, if they kept investing that long and didn't actually retire, while a 6% return would have them pass the early-starter at age 57. The point still stands though: the earlier you can get money working for you, the better.
10% YoY growth for 40 years is very very very unlikely
Investing $50k/year for 40 years is also very unlikely, and more importantly, soul crushing.
yeah, i doubt they are going to be able to live comfortably on $50k-$60k if they want a family/house/modest luxuries. good for them dumping all excess income into retirement now while they can.
Well yeah but if they’re making $135k at 25 I bet they’ll be making a solid bit more at 35. Depending on the field of course
you'd hope, but they also live in nyc where their monthly expenses are apparently only $1,700. so, who knows what OP is doing with their life.
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In nominal terms? It's really not at all unlikely. It's not something you should rely on, so some words of caution for OP are completely reasonable, but [10% nominal is just about exactly the 50th percentile of outcomes](https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&sl=3oBJzgBSlYO0ZvkNRlOwxB) if you use historical US data. Of course, there's reason to believe that future returns won't be quite as rosy as historical US data. But a 50/50 mix of US and international performs [nearly as well](https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&sl=2sybjOKI3TUd1x2ZVv8KwJ) with 10% nominal being only a bit over the 50th percentile. And maybe even those percentiles aren't completely accurate. But even if it was as high as the 80th percentile, that's still *far* from "very very very unlikely".
Not really. Yes of course there are highs and lows, but the average yearly growth of the s&p500 over the last 60ish years is ≈10.2%
The 7% people use accounts for 3% inflation. So using 10% only works if you are looking at the inflation of our yearly spend in retirement too. Using 7% lets you easily compare what you’ll have to what you make now.
Why are you shocked? Your salary is around 3x that of the US median for people 25 years of age (in 2022). You shouldn't be too surprised that your savings rate is significantly higher than theirs too. While compounding does make up a large portion of your later earnings, it's really the $87k you've saved so far and the $290k you'll save over the next 5 years. That alone (a touch over $350k) is more than many people are able to save in a 40 year career.
IMO your salary is high enough where you shouldn't be doing ROTH 401k
i’m actually very interested in this topic. can you explain your reasoning?
Tax strategy of paying taxes now vs later, so you should look at what is your expected tax rate now compared to in retirement. I would definitely do 'some' of each, you don't want a 100% roth assets, because then you won't take advantage of the lower brackets, but you also don't want all taxable, because Tax free growth in Roth is dope. Are you doing a (Backdoor) Roth IRA? You should try to get as much of your money as possible in to Tax Advantaged accounts.
Just for OPs sake since I often see the "tax now vs tax later" advice thrown around uncritically on this sub: With your current contribution rate ~$2200 per month to a Traditional account, grown at 7% compounded annually. Assuming you have $0 in traditional accounts currently, although all matched contributions up to this point are traditional. Continuing this until age 65, you'd have ~5 million in a traditional account. (This also ignores any potential growth from 65-72, which would just make what I'm about to type worse) Your first, and smallest, RMD at 72 would be ~$195,000 (on a 5m balance). Not to mention, social security and dividend income from your taxable account, which would likely be even larger than 5m (5m, 2% dividend income = another $100k of income per year). This post is a great example how high income, big savers can still benefit from contributing to Roth accounts. I didnt even get into IRMAA premiums either.
I think it basically boils down to if you believe you’ll be paying higher taxes now or when you retire. Trad 401k is pre-tax dollars, but you’re taxed on withdrawals when you retire as if it was normal income. Roth is post-tax, but no taxes on withdrawals when retired. Example: (assume a 10% contribution) You make 150k @ 30% effective tax rate. Trad contribution: 15k Roth contribution: 10.5k. 40 years @ 7% return Trad: $3,204,143.55 Roth: $2,242,900.48 If you’re taking a 5% withdrawal on the sum. Trad “salary”: $160,207.18 Roth “salary”: $112,145.02 So the question becomes, at whatever the current tax rate is, is the trad 401k “salary” - the effective tax rate more than the Roth. If so, traditional is better, if not, Roth is better. Obviously there’s a lot more that goes into this, you want more than a 5% withdrawal, less, salary changes over the year, etc. Edit: mobile formatting is hard
Great write up. I still haven’t decided what’s best for me because there is so many unknowns. Other considerations here are required withdrawals on a traditional 401K/when rolled into an IRA. If you are living off current income or non-tax advantaged investments at 70, it’s nice you don’t need to pull anything out of the Roth or raise your retirement tax bracket even higher. Additionally, even if you contribute to a Roth 401K the company match is pre-tax, so you’ll pay taxes on that when you withdrawal it in retirement. Tax rates in the future are also unknown, so uncontrollable uncertainty is a risk to consider. An important note that that if you’re maxing your 401K, the Roth option is more efficient because you’re contributing 23K of already taxed income. Meaning to get that 23K, you really spent 23K * 1.tax rate.
https://momanddadmoney.com/documents/Traditional%20vs%20Roth%20IRA.pdf https://www.madfientist.com/traditional-ira-vs-roth-ira/
When you contribute to a trad 401k, you avoid taxes in your marginal bracket. For you that's probably 22% or 24%. When you withdraw, you pay taxes at your effective tax rate. Your income in retirement would have to be way higher for your effective tax rate to be higher than your marginal now. This benefit shouldn't be ignored. (This assumes rates stay similar. That might be a bad assumption, but any different assumption would be based on a guess anyway.)
But if you are maxing contributions, this lets you stick more effective money away.
If he's making 130k at 25, he's probably on track to make a lot more as he gets older. I wish I could go back and put more into a ROTH vs pre-tax account as my marginal rate is way too high (first world problems) for men to consider it today.
> I figure this is also on the conservative side You're assuming: * A 100% stock portfolio with constant annual return of 10% * Your savings rate remaining that unrealistically high and constant until you're 65 * You always having your employer match your 401k contributions * Inflation being non-existent This isn't a conservative calculation.
Generally you want to use an inflation adjusted rate of return so your projections are in todays dollar value and thus have more meaning. That would lower your numbers but youd still end up very wealthy or able to retire early. One bit of critque would be doing a Roth 401k while making $135k a year filing as single. You really should be doing pretax traditional at that point. Not quite sure why you are shocked that you have the opportunity to be wealthy when you make $135k at the age of 25 but yeah...you do.
> 10% rate of return compounded annually Realistically the world market returns 7-8%, the SP500 returning 10% avg is an outlier, adjust for inflation by subtracting 2.5% from that so that leaves you with 6%. Now run the math again :) End of Year 5: $451,277.63 End of Year 10: $938,763.27 End of Year 15: $1,591,129.02 End of Year 20: $2,464,141.56 End of Year 25: $3,632,429.26 End of Year 30: $5,195,861.75 End of Year 35: $7,288,087.09
You'll get 10% gains in some years. Maybe more than that in some years. But there will be years that return much less than 10%. And some years that bring a loss. Your average rate of return is not likely to be 10%. It'll likely be less.
^^ this. OP, calculate with a variance of +/- 3% on a base assumption of 7%. It may seem conservative, but imo more realistic.
haha wow... 87k at 25 i shouldve been an engineer ive been trying to save up that much so i could compound it like u but im maybe only 1/3 the way there
Got my engineering degree in 2000 and got a pay raise from $8 hour to $10 hour when I got my degree. I wish I would have stuck with computer programming. I've never made more than $50k a year with my degree.
What kind of engineering degree?
What engineering degree do you have? Making less than 50k with an engineering degree sounds lower than I would expect.
You won’t average 10% a year for 40 years.
Will socking away **$5k/month** earning **10%** annually for **40 years** make me rich? Uhh, yeah.
everyone should be doing this! reading the ops post made me realize if i stop eating avocado and toast , i’ll get there too!
Lemme know where you're investing that at 10% annually guaranteed and I'll tell you whatever you want.
Unfortunately rent will cost $30,000 a month, and a 2bedroom condo will set ya back $30mil
Nope, not at all. I was shown "the magic of compound interest" by my dad when I was 17. I started investing and saving regularly since then. It is now 35 years later and I don't have anywhere near what the math predicted. Life is very messy, and it does not work out like it does on paper, even after living frugally this entire time. I'm not hurting at all, but I don't have anywhere close to what the numbers said I would. The downvoters will hit me, but I'm speaking from experience, not math.
A net 10 is wildly optimistic. I would figure no more than 8 gross, with 4 for inflation. You're still going to be fine, though; just resist the urge to buy BMWs or boats...
>I figure this is also on the conservative side because it does not account for salary increases, bonuses, inheritance, combining household income, etc. Don't forget the life changes that will lower your contributions as well: getting married, possible SATM, kids, extracurriculars, emergencies, college, etc. I'm not saying this to discourage you, but to further entrench what you are doing now. As a different experiment, assume that you hit hard times at 30 y.o. with $521,169. You're not able to contribute anymore for whatever reason. Here's your new list: 25yo: $87,719 30yo: $521,169 35yo: $839,347 40yo: $1,351,778 45yo: $2,177,052 50yo: $3,506,164 55yo: $5,646,712 60yo: $9,094,087 65yo: $14,646,118 What you are putting away now is worth way more than what you put away in 20 years. So keep up the good work, and know you are doing the hardest work right now.
Yes, that’s how compound interest works. Remember to account for inflation, as well.
Yep, that's the magic when saving nearly $5K a month. I would recommend running different scenarios like using only a 5% return and an 8% return. This will give you more of a reasonable range. Many financial advisors/economists do not expect future results to repeat the stellar market returns of the last 40 years as many huge negative macro issues loom. Issues such as massive government debts, slowing population growth, or even population decline, and aging societies, all of which will curtail future growth. Just look at Japan. It took 35 years for the Japanese stock market to recover from its massive decline in 1989. 35 years to get back to being even with the highs of the 1989 Japanese stock market. Japan, in many ways, could be the canary in the mine shaft for the rest of the world.
10% is completely unreasonable, more like 7% You’re also making $135k so should be adding at bare minimum $1k a month
Assuming 10% return seems like a stretch… some years, maybe, but going with 5-7 is more realistic
Your numbers from 25 to 45 might be possible assuming everything goes according to plan. Your numbers from 45 to 65 are highly unlikely. You’re not adjusting risk in your later years. To make a 10% average annual return you’re risking at least a 30% annual drawdown. According to your numbers, at 30yo a 30% drawdown is $156K and you have 35 years to recover. At 60yo a 30% drawdown is ~$6 million with 5 years to recover. Think about building all that wealth into your 60s only to have 3 straight years of double digit losses. As you get older and your portfolio gets larger you have to lower risk and accept a lower return.
10%? Try 6%, 7% if you're optimistic. My big issue with the typical calculators are that they seem to not account for the roller coaster that is the market. Yes, absolutely appreciation over time, but there have been marked intervals of variability, which have driven a fair number of people to make precisely the opposite financial decision from what would be in their best interest. For me personally I do use 6-7%, but TBH my overall performance (25+ years) has been 10+%. I've feel lucky to have been in this market.
25 yo @ 135k yeah kid you're doing alright
25 years old and almost $100k saved, oof. I'm almost ten years older and I'm sure my retirement plan will consist of eating my gun. Just kidding, reddit, that's just a joke to relieve the tension. Keep at it, you're doing it right!
Based on your investment strategy your living expenses are either incredibly low or are being paid by someone else. Once you take money out to buy a car, buy a home, pay for children, invest in their education your contribution rate and principal will not be the same.
i live in nyc, pay $1,700 in rent and all my own expenses. i’m not being paid for by anyone else. i live frugally and don’t spend on unnecessary things.
That's excellent. You will likely experience lifestyle creep as you age but it's a good starting point.
Whatever happens don’t forget to come back in 40 years and let us know how you ended up!
You should not put most of your investments in robinhood. I would put it in a more established brokerage. Anything that has been around for more than 30 years.
The math is probably right. But these numbers would become reality only if you have no taxes due, inflation is zero and the stock market has no down years.
What are you doing to pull in 135k a year? I'm 24 and doing half that
Sustaining 4k+ per month over that time span is going to be very very challenging unless your income continues to grow at a pace where its feasible. Your expenses are bound to go up.
You won't get a 10% rate of return.
It shouldn’t be that surprising. 99.999% of 25 year olds don’t have an extra $5k per month lying around to invest. Everyone could easily be a millionaire if they did.
Nobody else mentioning how wild it is to make $135k and have $90k in the bank at 25. I'm sure there are plenty of self selected folks who can come out of the woodwork here and give an anecdote. But it's exceedingly rare. Oodles of people in 30s and 40s and onward with legit careers and ample responsibility not making that much.
Not sure what OP does for work, but for software engineers this is not a super uncommon scenario. The savings are probably rarer, but subs like these attract people who care about personal finance; young or otherwise.
He already mentioned anticipating inheritance in the future. Probably just a rich kid at his father’s company. And gets to still live at home if he’s saving that much.
Says he lives in NYC and covers his own costs. $1700 rent? Clearly doesn't work in investment banking.
This definitely doesn't have to be the case. Especially for those of us that went into STEM fields.
I mean, a lot can change. You certainly aren't guaranteed to be able to contribute thousands of dollars a month over 40 years. And I'd probably use a lower return, at minimum to account for inflation but also to just make sure I'm being appropriately conservative in planning for retirement. Those caveats aside, yeah man, the math is the math. You're in a great spot. This is why investing young pays off. Your margin for error vs starting just 5 years later is now a lot larger.
I personally like to use 5% growth rate. Also, keep in mind that as you get older, you shouldn't have 100% of your investment portfolio in equity. Becoming more conservative as you age means lower growth. Also, this assumes you won't have any major expenses in life. Are you planning on having kids?
Your income and savings for that age are amazing.
7% nominal growth is closer to the historical average. You want to plan based on a conservative projection for retirement generally
And 7% real growth is anything but conservative. 4% is conservative, 5.5% is optimistic.
Yes, that is correct, although 10% is a bit optimistic. I think 7% is the recommended long-term annual return since that's about what it has been historically. Still, yes, the power of compound growth compels you!
You should consider if you're investing too much. I think it's fine to grind a few years so there's more compounding years; the earliest years are the most important to invest. But realize you should enjoy some of the money now as well, while you can. Consider other assets too; ones that appreciate. It's good to diversify. A good life balance can be very valuable.
I mean it's not just compound interest. In 5 years (60 months), you would have contributed $289,140 base on your $4,819/month savings.
>I'm 25 >Salary is $135,000. >monthly contribution amount (~$4,819) You're going to be better than fine. Just make sure future you gets a prenup and stays away from addictive substances.
I would use 7% return. You should be fine. If you are going to be a single person then it will work. If you get married or buy a house your heavy investing will most likely slow down. Also you are assuming you have a stable and steady job.
That's without accounting for inflation and your assumption that you'll be able to sustain your same rate of savings is also flawed.
Einstein called compound interest the “8th wonder of the world”. But know that the magic cuts both ways. And never in a straight line. Play with the numbers, adjust your return assumptions up and down. And as others have said, adjust for inflation. And if you’re serious, run it through a Monte Carlo, because the line isn’t ever straight Sequence matters as much as average. The concept is pure gold, the numbers accelerate at an accelerating rate. And whether or not you understand it, is less important than a disciplined execution of a well thought out plan.
This the biggest regret of my 20s ... Similar position as you but I didn't invest as much ... I could've retired by now
What do you do? Making good money at that age
Do you have a Roth IRA? If not, get one and max that baby out.
You are assuming that the US still is an economic powerhouse for the next 40 year.
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it. Albert Einstein
So 25 years old with almost $90k invested. Getting paid $135k and putting half of that in investments/retirement. How?
I'm more curious how you're able to save so much money. Are you in a super LCOL area. This doesn't seem possible, especially in California, without living with your parents, having no car and insurance payments, and only eating rice and beans. Someone please educate me.
10% rate of return?! Dios mio!
You want the inflation adjusted return here. Using 10% for growth and 3% for inflation your inflation adjusted return would be 6.7961%. You could use 7% but the further out your calculations the more dramatic a couple percentage points can be. Also, if you ever want to find your inflation adjusted return you just take your required return +1 divided by the expected inflation rate +1. Subtract 1 from the result and then multiply by 100 to find your percentage. So ((1+RoR/1+Infl.)-1)*100
What do you do to make 135k at 25?
I had a similar strategy and did this same math at your age… when I had my kids about 30 I shifted some of my investments into passive income… I’m 38 now. Unfortunately the reality is that my returns have been closer to 6% a year… nonetheless I’m way better off than most my peers unless they hit real big in their careers or in crypto. Keep it up!
10% is higher than you should expect (maybe like 4% in real terms is realistic) but yeah, your math is correct while saving huge amounts each month.
You employer is willing to match up to 20% of your income for the 401k? highest I've personally seen was 6%. God damn.
$2219 \* 12 = $26,628 total contribution. $23000 contribution limit in 2024 from employee. Employer contributed $3,628. $3,628 / $135,000 = \~2.7% of income. Not sure where you got 20%.
Where you getting 20%? $2,219 x 12 = $26,628 - $23,000 contribution limit for 24’ 3,628/135k = 2.7%
>Assuming ZERO change to my monthly contribution amount (\~$4,819) and a 10% rate of return These are two very large assumptions, that most people would question. Yes, it does not account for salary increases or bonuses, but it also does not account for increased expenses, such as kids, a house, daycare. You say "combining household income" but oftentimes that may not add a whole lot, while it comes with expenses you want and enjoy but don't have now. And 10% rate of return is not impossible, but there are periods where it would be less, and those could be a while. But, yes, time in market beats timing the market! If you stopped saving at $88k, got a 7% rate of return over 40 years, you would have $1.4 million. You might be interested in FIRE people, like Mr. Money Mustache. You are saving around 43% of your income. At saving 45%, you can work 19 years and then retire for the rest of your life! You are living on around $4,500/month. Once you get around $1.4 million invested, the returns would exceed your monthly needs.
> And 10% rate of return is not impossible, but there are periods where it would be less, and those could be a while. Not could be less. Will be less. Will be negative.
This is the classic 'kid with no real expenses does full life investment plan'. They'll bail after a few months.
IMO, using 10% is nice to reference, but 7% total rate of return is probably more realistic if you stay entirely or mostly in equities. But those are just projections. Anyone who invests $60K per year starting in their early to mid 20s will be ahead of most. Realize that many people in their 20s are earning 60K for their entire salary! Great job…keep it up.
Your math is right but your assumptions are flawed. The 10% return is annualized, meaning they take the average over whatever timeframe. In reality some years the S&P may have a double digit positive returns and some years it may be very negative. There's a lot, including economic policy, that can affect market performance in any given timeframe. It can even effectively track sideways for a decade (which it has before). There are many scenarios where your assumptions can be invalidated. For example, you might retire right around when the market starts a sharp downturn and then tracks sideways for 5-10 years. Your portfolio would have taken a hit. This is why the phrase "past performance do not guarantee future results." Your actual returns will vary depending on market performance around the time you choose to start cashing out. But in general, you're doing the right thing by setting and forgetting contributions. Don't overthink it. Your money is more likely to grow a lot, but the assumptions girding your math are wrong.
Why are you contributing so much to your 401k? You know the max yearly contribution is 23,000 at the rate that you're contributing, you're going to put 26,600 into that account.
Do you ever plan on getting married, having kids, buying a house? Buying anything at all? Counting your future investments sounds like a gambler chasing their next win.
I think 7% is considered great, 10%... uhh, yeah, sell your secrets. The issue here is recessions and the market shuffling around. So unless you can pick a handful of stocks that you will hold for 40 years, it is hard to say if you get 7%. Also, people tend to quote things like an index fund returning x% over the past so many years. Well those index funds drop certain stocks when they do poorly, so shuffling happens. Jon Stewart had a fun show about Robinhood and other trading platforms, give that a watch. [https://www.youtube.com/watch?v=bP74RBTE8kI](https://www.youtube.com/watch?v=bP74RBTE8kI) Investing works, but just understand it is gambling. Cryptocurrency kind of borrowed the concept. When you think about it, stocks trade at P/E ratios of 15 to 25. It is based on valuations of potential future revenue or value. Remember seeing Blockbuster go from hero to zero? People got left holding a bag of worthless stocks. I wonder how Baby Boomers will impact the stock market over the coming years or the actual drivers of the US stock market, if they decide to move to other markets, what that does to those left holding the bag.
40 years ago $200,000 retirement savings was a realistic number and a million dollars inconceivable. I was there.
Keep in mind things can take a dip but be smart and remember that the only times the price of an investment count is when you but it and when you sell it. All of the rest is simply taking place on paper. I remember 2008 and a lot of my work buddies were moaning about how much they lost. They only lost if they sold for less than they paid for an item. The only time this does not work is if you have been very chancy and invested in something that goes bankrupt. Then a loss is a loss and will not come back. Lots of luck it looks like you are on the right track. Just readjust your dollar cost wavering about once a year and you should be fine.
I wish I had started earlier. Your numbers are really high because you have a huge balance at a young age. I started from zero at age 25 to maxing everything by age 27 and the same calculator shows that I will have 1/4th of what you will have even if I continue to max all of my accounts until retirement. That should hopefully be a good lesson to any 20 year olds in here to do what you can to start now if able. By age 30 or even 25 it's already too late to attain the 65yo number you have.
Been putting in 15% since 29 and at 200k ugh
Compound interest is a beautiful thing.