First, amortize the $8,250 annual contribution with the same rate of 8%, but instead of 30 years, do 35 years. You will find it is more than $1.5M. Next, amortize the $8,250 annual contribution, but change the rate to 10% for 25 years. Voila! $2.5M!

The one thing that this does not take into account is that you should be increasing your annual contribution with each passing year. Maybe you should step it up based on a rate of 3%, similar to inflation. That alone will make a huge dent in the original amortization of 30 years at 8%.

As far as the CPI understating inflation, I totally agree. It has seemed as though the cost of everything is rising alot higher than 2 to 3%.

Brett, thanks for your kind comment. I’ve also talked to people who sound so surprised and almost insulted when I say that I’m going to most likely need much more than $1,000,000 when I retire 30+ years from now unless I move to another part of the world.

Second, we have a net worth of over 400K and certainly do not consider ourselves well-off. We worry about job security, we worry about the domestic and world stock markets, we worry about the impending insolvency of Social Security and Medicare.

Third, I had an experience of explaining inflation to a friend. She had a target net worth of 1.2M for retirement and I said “wow my target is 2.5M”. After digging a little deeper it turns out she had no inflation assumption but I was assuming 3% for 25 years, so in fact we ended up having nearly identical goals if we inflation-adusted her figure. Point is: your post may be a wake-up call to some.

A related point to consider is what is the rate of inflation? The CPI numbers are generally regarded as understating the true rate of general consumer price increases. Also, in the context of retirement planning you need to consider whether the general rate of price increases is representative of the rate of increase in your personal living expenses.