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.
Updated May 17, 2011 and originally published January 11, 2005. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.