Will an investment of $140,000 be worth $9,300,000 in 45 years?

[davidixoye]

@southerngal2 I only say 20 in relation to my sister. My father and I are big into investing. My sister didn't know what a stock was until this year. But now she invests a lot, and is doing great. I didn't think the average age was that late, but it makes it all that much better.

 

[joy_m]

@nina_m Inflation is the other killer usually.

 

[resjudicata]

@joy_m Correct me if I’m wrong but I believe those historical return rates take into account inflation. So 7-8% should have already be post-inflation

 

[mike84k]

@resjudicata Your are wrong, the 7-8% does not take inflation into account. The other piece you are missing is taxes. You may be able to defer taxes on a portion you can shelter, but you will have to pay tax eventually.

You're on the right track though.

Also, keep in mind that the reported inflation is artificial and not true inflation. You may want to be conservative and use at least 3% for inflation but may be even 4-5%. Once you also account for taxes you'll find your situation won't be so rosy after all.

 

[davidixoye]

@mike84k He was correct. The average stock market return over the past 30 years was 10.7%, 8.3% adjusted for inflation. The stats may be off a little bit but not much. I also did not include taxes, so thank you for that. It will not equate to $9 million due to taxes and the market and inflation, but it will still be a large sum.

 

[mike84k]

@davidixoye Fair enough based on the data you use. I recall seeing a bit lower long term returns, and you also have to remember that past returns are no guarantees for future returns. But you should be able to account for that if you incorporate realistic standard deviation values and use Monte Carlo analysis as one calculator does that someone posted.

IMHO you want to be very conservative as you don't want to arrive 45 years into the future and find out your calculations were too optimistic as you can't go back in time to make adjustments. I'm sure you can however find ways to spend any extra money you accumulated that you didn't count on.

 

[davidixoye]

@nina_m Hi,

I just did some more math. I doubt I will be able to hold for 45 years. So this is what I figured. I invest all $140,000 at 20. At 30, I collect 50k. At 40, I collect 100k. At 50, I collect 200k. At 60, I collect 300k. At retirement at 65, I collect the remaining, $6,790,068.21. This is still an insane number to me.

I also did another figure. Instead of investing $140,000, I invest $100,000 at 20, and keep the remaining $40,000 for my beginning of adulthood, whether that helps with an apartment/rental, getting a used car, or spending money. The following is how I charted it...

25 - Collect 50k

30 - Collect 50k

35 - Collect 50k

40 - Collect 50k

45 - Collect 100k

50 - Collect 100k

55 - Collect 100k

60 - Collect 100k

At age 65, the investment is now $4,180,622.70.

Basically, I agree entirely. I would not want to live "cheaply" for most of my life. I think an extra 50k/100k would help with that every 5 years, and I still get over $4 million at retirement, plus the $40,000 to help me get rolling out of trade school.

 

[bc1]

@davidixoye Here’s a calculator that gives a more realistic model

I used 9% for the CAGR with a 20% std dev. That’s approximately the compound annual growth rate from 1802-1990 and the standard deviation from 1928-2020

I also used 2.7% for the inflation rate with a 1.1% std dev. That corresponds to inflation in the 20th century. Inflation has been significantly lower for most of your life, but you’d be too optimistic to assume it’ll continue that way for the next 45 years.

All in all, I think you’re neglecting inflation and being too optimistic in your calcs. The numbers you’re giving have about a 50% chance of being nominally true. Note that the model in the link I posted assumes that you’re increasing your $1,000/mo every year at the rate of inflation, so by the end of it you’re doing over $3k/mo. When adjusted for inflation you’re probably closer to $2,000,000 in real 2021 dollars. That’s a reasonable nest egg to retire on. As your income grows you’ll probably start throwing more into retirement

You’re also probably a little optimistic on how fast your salary will hit six figures. Don’t get me wrong, trades are great and all, but you probably won’t hit six figures in your 20s. Owning your own business is your best bet to hit the high income

A problem many people have in the trades is financing toys. I work in the oilfield, it’s a stereotype that every kid in their 20s goes out and finances a new raptor, expensive side by side, motorcycles, boats, etc. These payments on toys take away from the money you have to invest. Don’t fall into that trap. Don’t wait until you’re 65 to start living either. And don’t plan on blowing all of your nest egg on expensive toys/boats/vacations

Also, with a 45 year investing horizon don’t get trapped into the “very conservative” investment mindset. There’s nothing conservative about being heavy in bonds. When you’re young you need to be aggressive

 

[davidixoye]

@bc1 When you say $2,000,000, you are saying inflation will cause the $9,300,000 to lose 4x its value?

 

[bc1]

@davidixoye Pretty much (4.6 times its value). Think about what things used to cost 45 years ago (in 1976). Here are some of McDonald’s menu prices from 1976: Big Mac (75 cents), Quarter Pounder (70 cents), Quarter Pounder with Cheese (75 cents), Filet-O-Fish (65 cents), Hamburger (30 cents), Cheeseburger (40 cents), Medium French Fries (45 cents), Hot Apple Pie (45 cents), Medium Strawberry and Chocolate Shakes (45 cents), and Medium Soft Drinks (30 cents).

A $900,000 boat today is probably gonna be closer to $4,000,000 in 45 years. A $200,000 boat today will cost closer to $900,000 in 45 years.

Here’s an inflation calculator. You’ll find that $100 in 1976 is $465.51 in 2021. Said another way: it takes $100 in 2021 dollars to buy $21.48 worth of stuff in 1976 dollars. Think about things that cost $100 today, now imagine them costing nearly $500 in 45 years

 

[sjastro]

@davidixoye You’re pretty smart to think this far ahead!

Most people struggle investing 1k a month. At least until they have an established career. Most people also struggle to make more than 100k/year.

I think what your missing is how much life actually costs. My guess is homes around you cost about 600k. That’s roughly a 60k-120k down payment with a mortgage of $4000/month.

Then cars, lifestyle, vacations, and kids. Kids are very expensive. I pay 34k/year on having two little ones at a nice daycare.

Our HHI is a our 400k which is huge relative to our neighbors but pocket change compared to many others in the world.

Here’s my advice to you as I deeply struggled at the stage you are in.

Now is the time to invest heavily in yourself, so find a hard skill that will pay well and you can lean on forever.

Certainly being an electrician would be good. Also, accounting, programming, structural engineering, etc. avoid soft paths like psychology, management, etc.

From there you will build up a career and always find a place to fall back to. I know it’s daunting to pick at this stage but don’t stress it too much, you will pave your own path as you go.

As you do this look for huge companies that do this. Then go on LinkedIn and find people that do really cool jobs. Reach out to them for a 20min informative interview. Look at their profiles to see how they got to where they are. Copy that path to some level.

Best of luck man! You will do fine in life just don’t give up your hunger.

Also, don’t plan on working until you are 65, you will have some bad years and some good years. It’s better to move the goal posts so if anything happens you’re still on track and have some flexibility to take sabbaticals.

 

[spreadthewordofgod]

@sjastro seconding this linkedin advice

 

[alice96]

@davidixoye Will and can are two different verbs.

 

[abigale7]

@davidixoye 8% is really unlikely in a conservative/safe investment. You can get higher but you take more risk and that will possibly impact your investment. I would run your model at 4 or 5% and see what more conservative numbers look like.

Your plan also does not have any consideration for inflation (2-3% per year) or other things that will draw into your savings like raising a family and so on.

Your basic math is correct, but you are leaving out a lot of real variables (vs the long shots)

 

[trumpi123]

@abigale7 This...
Most financial models have three cases. One low return (3-4%), one normal (5-7%), and one in excellent market models (9.5%+)

 

[primsroses]

@abigale7 Agreed you want investment at say 6%-inflation 3% so increase of 3% a year

 

[rbaitz]

@primsroses Smooth brain thinking right there

 

[primsroses]

@rbaitz So if you assume 6% returns and 3% inflation. Is it not ok to assume 3% per year? Or is that too conservative. You want to translate it to real rate of return don’t you?

 

[jkrlynch]

@primsroses This isn’t Argentina.

 

[prisha]

@davidixoye Look into the wages electricians actually make. It looks like it’s closer to 1/3 or 1/2 of what you anticipate making. Trades can be hard on people physically and take their toll on your body over the years. You also may have fewer options without a degree than with.