Re: Am I missing something here about planning for retirement???

Viking wrote:
> Pundits say to expect only 7% return from the market these years. OK.
> Inflation runs at, say, 3.5% (a low estimate given what's happening to
> oil). OK, that leaves a return of 7% - 3.5% = 3.5%. Say taxes and fees
> (broker/fund/etc) take part of that, leaving your yield at 3%.
>
> So say that you want to invest for retirement, and can put away $500
> a month, or $6,000 a year. OK. Say you decide you'll need $1,000,000
> in today's dollars to retire. OK, that means you should use the
> inflation-adjusted annual return of 3% to get there.
>
> So how long will it take before you can retire?
>
> If you invest $500 a month, it'll take you 60 years to reach
> $1,007,606.
>
> 60 years???
>
> At 40 years, more or less the maximum length of time for most working
> people, you'll only have $465,949.
>
> If you're fortunate enough to be able to invest $1,000 a month
> (significantly more than the average person can afford), investing
> $12,000 annually at an annual rate of 3% will take you 42 years to get
> to $1,013,767.
>
> That's 42 years, if you can invest $1,000 a month, which most people
> can't. How many people do you know who invest $1,000 a month for
> retirement?
>
> So tell me: is the market way a bust as far as saving for retirement
> goes for the vast majority of people??? Am I missing something? How
> are people going to be able to retire?

Hmmm.. I think you have missed a lot of things.

I don't know who your pundit is or what make of crystal ball he is
using, but I prefer the historical record as given by Siegel in his book
"Stocks for the long run". His Table 1.1 shows the Total Real Return,
after allowing for inflation, from 1802-2001 as 6.9% per annum compound.
A slightly more modern period of 1871-2001 gives 6.8%. In this century,
1926-2001 gives 6.9%. Getting a bit samey isn't it.

1982-1999 gives a much larger 13.6% but most of that was a bull market.
If you look at the preceding period, 1966-1981 you get only -0.4%, a
loss over 16 years. So, how about 1966-1999? Doing the sum properly
gives a total ratio of 0.996^16*1.136^18 = 9.31 and the average total
real return per annum over the 36 years was 9.31^(1/34)-1 = 6.8%, again.

So, try plugging 6.8% into your formula and see what you get.

Another assumption is that you are forced to just feed your money into a
buy & hold system while you sit there for 42 years doing nothing and
hoping for the best. There are two classes of people who want you to do
this 1)The mutual fund companies who get their fees while you remain
invested regardless of which way the market goes and even if you make a
loss 2)Those who believe the mutual fund companies and don't think for
themselves.

These people would have you make slightly less than nothing in periods
as long as 16 years, like from 1966-1981 while the market actually went
up and down quite a lot. In 1973-4, for instance there was a major crash
and UK shares fell by 75% and then recovered. Any vaguely effective
timing method could have made money there.

The mutual fund companies are quite happy for you to lose 16% on S&P
index funds, and even more on managed funds on average, since 2000
because they still get their millions in fees whatever happens to you.

Instead of sitting about passively worrying about poverty in your old
age you need a bit of that old US get up and go. This is serious stuff
and no one cares about your money more than you do. Nearly all of those
who seek to advise you like IFAs and Mutual funds are keen to get a grip
on a slice of you money as fees, independent of any success or failure
you may have as an investor. Caveat Emptor as they used to say.