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January 03, 2008


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that works great for people like me who plan on retiring in about 30 about everyone else? Seems sort of limited in the target audience.

How do you figure $1 million?

If you save $10,000 every year for 10 years, at the end of 10 years you will have $145,000 (assuming 8% growth). If this $145,000 continues to grow for 20 years, then you'll have $675,000. Not quite $1 million, but very respectable considering you only put in $100,000.

Your math only works out if you contribute $100,000 upfront. Otherwise, investing $10,000 every year for 10 years won't get you to $1 million in 30 years because only the first $10,000 will compound for 30 years.

But that's nit-picky math. It's never a bad idea to save what you can. :)

Plus, heres another thing, if you wanted to buy that luxury car now for 40K, and instead decide in retirement in 30 years your going to buy it instead, guess what it will cost? Around 90,000. Plus when you withdraw that 400K from your retirement savings you'll have to pay tax on it and assuming if you withdraw that much you'll keep a little more than half because of taxes; you'll get to keep maybe 250K. Add the sales tax of 7% on the 90K car and other fees your looking at 100K. So in the end you have your car, and enough money do do almost nothing with . . . after only waiting 30 years.

Plus, since I'm assuming you financed the car, you probably took an interest only payment loan to get the 40K to invest in the first place, so the situation looks EVEN WORSE once you account for that.

Why even bother... why not rack up as much debt as you can and then die . . . it's far more fun ;)

Lily, what if you invest each 10K in for a 30 year period and then withdraw only what each 10K amount made, so the total time is 40 years . . . then it makes it much easier to just say you'd probably make a million.

Actually, Traciatim's math isn't exactly kosher, either. Money invested in the stock market at 8% returns will grow faster than the prices of cars at the rate of inflation at 3-4%. (At least, I sure hope inflation never reaches 8%!)

Moreover, you'll probably keep more than half in taxes. If your money is in a taxable account and you held it for 30 years, you'd only pay long-term capital gains. If Congress changes the tax code, it may not be as low as 15% any more, but it probably won't be 40%, either.

If you kept the money in a tax-deferred retirement amount, you have to be really spending in retirement to be in that high of a tax bracket. But while the tax will eat a bit into your account, you're still way better off than if you hadn't saved at all, because you'd be paying that tax whether you have retirement savings or not! (I mean, you have to pay your living expenses somehow.)

If you kept the money in a tax-free account like a Roth IRA, you certainly don't have to pay taxes on it.

But I guess, this being election season, everyone's free to use "fuzzy math." ;)

hmm, that math business makes me sad...I feel like it makes me want to never spend any money. Too bad I just gave $10 for a group gift...that's like $100?

so unfun!

Wow, that's an eye opener. I wonder if that works for all purposes??

a coworker and I have been on a kick of talking finance. We were discussing the age old question of "To prepay the mortgage, refinance to a shorter term or just pay the 30 year fixed and take the difference that you would prepay and invest".. We came to two conclusions (off topic and talk about fuzzy math):

1.) If we really feel that desire to have that psychological feeling of paying the mortgage early, we should refinance to 15% mortgage notes. This way we can feel good about prepaying and getting the guaranteed 15%!

2.) We should just buy everything we will ever need now on credit. That way we beat inflation.. Think we'll need 10 more cars before retirement? Just buy them with today's dollars and beat inflation.

We quickly got back on topic. That was obviously a joke... Regardless of how you do the math the point remains the same from the post above. Save more than you spend. You can live in debt like someone posted and spend now but you will only increase the burden to yourself, your loved ones (if they are even prepared to support you, that is).

So the point I takeaway here is save those big purchases , save the little purchases, save it all. Add the extra 0 when thinking of getting a new TV. Yeah sure inflation and taxes can figure in but money spent that you didn't NEED to spend is still wasteful and whatever tip I can use to remind myself that I need to spend less and save more is something I'll take.

The obsessive focus on retirement by some of you bloggers is insane. Sure you should save for retirement, but you people seem to make it your life focus. Going through your life, particularly all the great younger years, preparing for the days when you're at your oldest?????? Puhleeeze.......if spending $10k on something right now is something you want to do and can afford, even if its not NEEDED but for PLEASRE (you know that reason we live for) -- than just do it!

It must be depressing obsessively preparing for the days when you probably aren't going to be able to do a whole lot anyway. Enjoy your youth! Live an exciting life!

Very cool concept. Even if the math doesn't work out perfectly, it's still a good way to keep from spending money frivolously.

Yes, Becky has said it right.

Not sure about the maths and all, but the concept of not spending 40K now for 400K in the kitty later sort of really drives home the point.

Hmm.....must keep on thinking about this.

And it may be of use for Craziness to know that many of those who had a gala time and enjoyed their younger days (like me) are now having to work 3 - 5 times harder to make up. Wish I had not lived up some of those gala times...sigh.

Lily --

To get to $1 million, yes, it would take more than 30 years (somewhere between 30 and 40 years, actually).

Craziness --

You assume saving money doesn't bring people pleasure.

Obviously, people need to enjoy their money, but they do need to think, especially when making frivolous purchases, what those purchases are costing them.

Fathersez --

Good perspective.

Saving for retirement is more important today than ever. But we have to live in the meantime. Don't underestimate the value of a restful vacation (I don't mean a four or five digit dollar vacation every year!). We also need to upkeep our homes, and within reason, improve them for our enjoyment. If you listen to every financial pundit, we would live in cells, wrapped in bug-ridden blanket, eating just bread and water. Financial planners are moving pieces on a chess board; the rest of us are living our lives.

I agree with craziness.

Almost every blog I read has some sort of obsession with retirement. My grandmother has lived absolutely frugally all her life. She is now in retirement, with God only knows how much money....multi-millions. However, she is still in the same mindset that she has been all her life, afraid to spend any money. She buys the least expensive option, has never went on a vacation, etc.

I am just starting out in my working career. Why would I want to bust my ass for 30 or 40 years, saving every penny, just to reach retirement rich, but with the mindset of being the most frugal person on earth, but never having really enjoyed any of the fruits of my labor? The idea that we can save, save, save all our lives and then simply go buck wild enjoying life in retirement is a little sad.

I would like to spend some of my money enjoying life right now before I am wearing adult diapers, buying 35 cent toilet paper, have bad knees, bad eyes, etc.

Not to say that I am not going to save for my retirement years, but I am not going to forego enjoying the next 40 years of my life in hopes of enjoying the last 20 or 30...

God never promises us tomorrow, much less 30 more years...

Just something to think about. I think the personal finance blogging community, at times (frequently), borders on rediculous obsession with retirement.

Craziness - since when did spending money = living an exciting life?

I know lots of people that "spend like crazy"; and they don't seem happy to me. They are chasing something that can't be purchased.

Large debts and an uncertain future are not my idea of fun or excitement.

While I live frugally and save for retirement, that does not translate into living a miserable life. My priorities are just different. I prefer financial independence over a $60k automobile, designer clothes, and $300 dinner tabs.

If you are honest about what's really important, you'll find a balance of enjoying today while saving for tomorrow.

As with everything there needs to be a balance and I think the most successful personal finance blogs strike this balance.

Planning for and saving for the future is *always* a good thing but I know too many people who do sacrifice current happiness in their quest to save as much as possible. They've become addicted to saving and in many ways exhibit classic signs of addiction. If you've spent your whole life feeling guilty about spending money it's very hard to change course when you hit retirement.

Obsessive frugality can be as detrimental to one's well-being as excessive spending.

Craziness and Wanzman

Nobody says that you have to be a miser from the time you get out of high school. You do need to enjoy your life. However, right now I'm 47. I don't own a home, and owe about $25,000. I don't have a pension plan. Retire? I can't afford to!

If I had paid a little more attention when I was younger and saved just 10% of what I earned I would of never have missed it and would be in a hell of a better position in life.

Time for compounding interest can never be regained. Learn from my mistakes, use it wisely.

Good luck with your lives!

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