MM from PFBlog posted a link to an article by Dustin Woodward, a Webmaster/Researcher for an investment advisory firm, called What it Takes to Be a Millionaire. (That’s the name of the article, not the firm.) It turns out the process is simple—start saving early and rely on compounding interest. There is a problem—a big problem—with the article.
Statement 1: If you start when you’re 30, saving 10% of your $50,000 salary, gaining 10% compounded interest, you’ll be a millionaire by the time you’re 59.
Statement 2: A million dollars might not sound like much, but it is enough to retire on now.
Conclusion: Start investing now to these specifications and retire comfortably later on.
Anyone catch the logic fallacy? If you start now at the age of 30 and retire 29 years later, future inflation comes into effect. While a million dollars might be enough to retire on now (admittedly by the author a modest amount due to past inflation), it won’t be enough 29 years from now.
Put simply the article assumes you started investing 29 years ago and you are beginning to take distributions from your million dollar retirement fund now. This is not how people give and take advice, since you can’t turn back the clock unless you’re Dr. Emmett L. Brown.
I’m going to start emboldening random words and phrases because that’s what people, especially bloggers, do when they think what they have to say (and thus the person saying it) is very, very important.
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6:30 pm (reply)
Yes, the math didn’t factor in inflation. On the flip slide, you can also argue the salary will increase over time too, so saving 10% for 29 years can still buy comfortable retirement.
7:26 pm (reply)
That’s right, it should work out inflation-wise as long as there are increases beyond the 3% per year that the author already factored into his calculation.