Most seem to be asking the question, "how can I retire without saving for it?" As though there is some magic formula that the guy taking the 1% fee knows. (Actually, he does—it is consistently taking 1% of your money.) How to retire? By consistently spending less than you bring in. Only break this rule rarely and for very good reasons: learning a trade, buying a business, etc. If you are going to start saving at age 25, and save until age 65, that gives you 40 years to save. If you live until age 85, that's 20 years to spend those savings. So, that means in retirement each year you can spend twice what you saved each year while working. Wait.. Whu? That's right, there is no magic way that saving for 40 years and spending it over 20 years is more than a 2:1 ratio. But what about compounding? Here I will invoke Einsteins Theory of Relativity. Compounding looks like magic if we ignore the fact that whatever we will buy later (deferred spending) isn't compounding at the same time. So we really need an investment return that exceeds the compounding rate of deferred spending, rather than the rate of inflation. Wow, that hurt my head. Okay, if we look at computers, the price has come down while the functionality has increased. Had I instead of buying that Kaypro computer with two floppy discs, I had invested that money, today I could buy a lot more computing with that compounded deferred spending.
Except we are talking about retirement. Think what retired people spend money on. Medical costs are not moving the way computing costs did. Housing is not getting more affordable. The items used to calculate inflation are not what retires spend money on. The deferred spending is likely to purchase even less. Imagine if we could instead of saving for retirement, (while taking on a lot of investment risk) we could just pre-pay for our retirement homes and medical costs. Then as those costs compound faster than the investment returns compound, we would be indifferent. But that is not our world.
So what to do? Stop deluding yourself about the power of compounding. It is a three card monte trick. Work more. Spend less. No one is impressed with your car, except your car salesman, and he was faking it. Understand the market risks you take as you invest your hard earned money. Stay healthy. Good luck.
I am Fire Lord Jim and I approve of this message.
