7 ms·

Yeah, it's also using a 9% rate of return for the "conservative" scenario and 12% for aggressive. Due to the exponential nature of compound interest, just a sin

by teej 9y ago

Yeah, it's also using a 9% rate of return for the "conservative" scenario and 12% for aggressive. Due to the exponential nature of compound interest, just a single point of overoptimism in your real growth number leads to a massive overestimation of your results. 1.07 ^ 30 = 7.6, 1.09 ^ 30 = 13.3, and 1.12 ^ 30 = 30.0 It's baseline assumptions are way off.

Zanni 9y ago
Even worse, "aggressive" is being used here synonymously with "higher rate of return." The risk isn't reflected in the graph at all. Why would anyone looking at this not choose aggressive? Look how much higher the total is! Really misleading without some visual indicator that your return might actually be lower for some time horizon ...
- OrwellianChild 9y ago
  The graph should really be cone-shaped at the far end to reflect range of risk with aggro and conservative expectations. A gradient to show high-end and low-end of returns would be visually very instructive.
astura 9y ago
Not only that but people change risk throughout their lifetimes with their age and life situation. You're probably going to start out very aggressive in your 20s and end up a bit more conservative by your 50s. Usually.
shove 9y ago
Yikes!
allsunny 9y ago
Double Yikes!
hiram112 9y ago
>it's also using a 9% rate of return for the "conservative" scenario... If 9% is good enough for most federal, state, and local pension estimates, it's good enough for us, too. /s
- ptero 9y ago
  Hell, no! Google for "unfunded pension liabilities". 9% is wildly unrealistic for those estimates as well, but the folks who negotiate those hope to be retired and gone far away by the time when those obligations come due for large numbers of retirees.
- teej 9y ago
  If you want a fun story of making terrible long term choices based on faulty rate of return numbers, look no farther than MLB player Bobby Banilla (https://en.wikipedia.org/wiki/Bobby_Bonilla https://en.wikipedia.org/wiki/Bobby_Bonilla). The Mets wanted to get rid of Bobby in the year 2000 but owed him $5.9M. Mets owner Fred Wilpon thought it a good idea if he asked Bobby to defer payments on that $5.9m for 11 years. Fred would invest that $5.9M today and make out in the black. Fred would just turn around and get a 10% return from his buddy Bernie Madoff and have over $16M in 11 years. Lets just say that story doesn't have a happy ending. Bobby Banilla will get paid $29.8M dollars over 25 years for a season he never played. http://fivethirtyeight.com/features/the-bobby-bonilla-retirement-plan-quit-baseball-in-2001-get-paid-until-2035/ http://fivethirtyeight.com/features/the-bobby-bonilla-retire...
naiyt 9y ago
5% for conservative and 7% for aggressive would have been better choices...I know the goal was to make this calculator simple, but those values should have be configurable with saner defaults.
dclowd9901 9y ago
There's also issues with the suggestions. It suggests driving for Lyft or Uber for a cool $28k more a year, but the article linked doesn't seem to account for costs of that work, just revenue.
- astura 9y ago
  Turns out after accounting for costs Uber drivers MIGHT even make less than minimum wage https://www.npr.org/sections/thetwo-way/2018/03/02/590168381/uber-lyft-drivers-earning-a-median-profit-of-3-37-per-hour-study-says https://www.npr.org/sections/thetwo-way/2018/03/02/590168381... And why "Uber?" Cuz it's cool? Why not "Starbucks barista" or "shelf stocker?" Because what we're really talking about is "work more" I guess "part time job" doesn't sound as hip as it used to...
  - TomMarius 9y ago
    Flexibility and "being your own boss" (deciding when you're going to drive by yourself, not with some kind of manager) is important to a lot of people.
- internetman55 9y ago
  Is that actually a suggestion? If you make an upper middle class salary (like a programmer does) and reasonably control your expenses, I think you only are going to miss making retirement if you have an expensive medical disaster or you invest too heavily in the market then sell during a crash to make rent, or some weird thing like that. I'm not sure if $20000 is going to make your difference
ryandrake 9y ago
Yowzers! Please tell me what this magical investment is where I can expect an average rate of return of 9% (let alone 12%). That is off the charts optimistic.
- deleted 9y ago
  [deleted]
- akvadrako 9y ago
  You can get guaranteed 11% returns at https://www.twino.eu/ https://www.twino.eu/ I used it for a while; it did work and their published financials are solid, but being happy with some risk I decided stocks where a better play. Still, it's a useful baseline.
  - compiler-guy 9y ago
    tino shows a default or delayed rate of around 25%. That means your returns are not risk free.
    - akvadrako 9y ago
      That doesn't matter, because for the highest rated loans (Buyback and PG) Twino guarantee payments even in the case of defaults or delays.
      - compiler-guy 9y ago
        That just shifts your risk to whether or not Twino succeeds. This may be lower risk than the original loans, but it is still risk.
  - astura 9y ago
    That's not what "guaranteed" means.
    - akvadrako 9y ago
piracykills 9y ago
Wow, that's pretty crazy - ~5% bonds for conservative and ~7-8% for aggressive would have been more appropriate in my opinion. And I feel even those numbers may be a little optimistic. Currently it's more like "what if you have a great market year every year until you retire" or "what if you can reliably beat the market" - neither of which is likely to happen.
- jonknee 9y ago
  To be fair the total annualized return of the S&P 500 over long periods is roughly 10%. You don't have to reliably beat the market to reach those numbers. It's interesting to play around with: https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/
  - teej 9y ago
    I think you forgot to click the “inflation adjusted” checkbox. The real rate of return is closer to ~7%. Also caveat emptor - past performance is no guarantee of future results.
    - jonknee 9y ago
      But the calculator you're criticizing does not adjust for inflation...
      - stochastastic 9y ago
        I think that’s the point. A projected savings balance is misleading without considering inflation, so if the calculator doesn’t make an explicit adjustment for it then there ought to be an implicit adjustment in the rate of return assumption.
    - Spooky23 9y ago
      Says who? Projecting historically low inflation is no less reckless than ignoring it. Imo, you're better off looking at absolute returns and tweaking your expectations based in inflation as itnhaopens.
gaius 9y ago
This effect of tiny changes having massive impacts is why Gordon Brown’s smash and grab raid on the private sector pensions, coupled with artificially low interest rates was so damaging and lead directly to the property bubble and the financial crisis in the UK.

by teej 9y ago

Zanni 9y ago

Even worse, "aggressive" is being used here synonymously with "higher rate of return." The risk isn't reflected in the graph at all. Why would anyone looking at this not choose aggressive? Look how much higher the total is! Really misleading without some visual indicator that your return might actually be lower for some time horizon ...

OrwellianChild 9y ago
The graph should really be cone-shaped at the far end to reflect range of risk with aggro and conservative expectations. A gradient to show high-end and low-end of returns would be visually very instructive.

astura 9y ago

Not only that but people change risk throughout their lifetimes with their age and life situation. You're probably going to start out very aggressive in your 20s and end up a bit more conservative by your 50s. Usually.

shove 9y ago

Yikes!

allsunny 9y ago

Double Yikes!

hiram112 9y ago

>it's also using a 9% rate of return for the "conservative" scenario... If 9% is good enough for most federal, state, and local pension estimates, it's good enough for us, too. /s

ptero 9y ago
Hell, no! Google for "unfunded pension liabilities". 9% is wildly unrealistic for those estimates as well, but the folks who negotiate those hope to be retired and gone far away by the time when those obligations come due for large numbers of retirees.
teej 9y ago
If you want a fun story of making terrible long term choices based on faulty rate of return numbers, look no farther than MLB player Bobby Banilla (https://en.wikipedia.org/wiki/Bobby_Bonilla https://en.wikipedia.org/wiki/Bobby_Bonilla). The Mets wanted to get rid of Bobby in the year 2000 but owed him $5.9M. Mets owner Fred Wilpon thought it a good idea if he asked Bobby to defer payments on that $5.9m for 11 years. Fred would invest that $5.9M today and make out in the black. Fred would just turn around and get a 10% return from his buddy Bernie Madoff and have over $16M in 11 years. Lets just say that story doesn't have a happy ending. Bobby Banilla will get paid $29.8M dollars over 25 years for a season he never played. http://fivethirtyeight.com/features/the-bobby-bonilla-retirement-plan-quit-baseball-in-2001-get-paid-until-2035/ http://fivethirtyeight.com/features/the-bobby-bonilla-retire...

naiyt 9y ago

5% for conservative and 7% for aggressive would have been better choices...I know the goal was to make this calculator simple, but those values should have be configurable with saner defaults.

dclowd9901 9y ago

There's also issues with the suggestions. It suggests driving for Lyft or Uber for a cool $28k more a year, but the article linked doesn't seem to account for costs of that work, just revenue.

astura 9y ago
Turns out after accounting for costs Uber drivers MIGHT even make less than minimum wage https://www.npr.org/sections/thetwo-way/2018/03/02/590168381/uber-lyft-drivers-earning-a-median-profit-of-3-37-per-hour-study-says https://www.npr.org/sections/thetwo-way/2018/03/02/590168381... And why "Uber?" Cuz it's cool? Why not "Starbucks barista" or "shelf stocker?" Because what we're really talking about is "work more" I guess "part time job" doesn't sound as hip as it used to...
- TomMarius 9y ago
  Flexibility and "being your own boss" (deciding when you're going to drive by yourself, not with some kind of manager) is important to a lot of people.
internetman55 9y ago
Is that actually a suggestion? If you make an upper middle class salary (like a programmer does) and reasonably control your expenses, I think you only are going to miss making retirement if you have an expensive medical disaster or you invest too heavily in the market then sell during a crash to make rent, or some weird thing like that. I'm not sure if $20000 is going to make your difference

ryandrake 9y ago

Yowzers! Please tell me what this magical investment is where I can expect an average rate of return of 9% (let alone 12%). That is off the charts optimistic.

deleted 9y ago
[deleted]
akvadrako 9y ago
You can get guaranteed 11% returns at https://www.twino.eu/ https://www.twino.eu/ I used it for a while; it did work and their published financials are solid, but being happy with some risk I decided stocks where a better play. Still, it's a useful baseline.
- compiler-guy 9y ago
  tino shows a default or delayed rate of around 25%. That means your returns are not risk free.
  - akvadrako 9y ago
    That doesn't matter, because for the highest rated loans (Buyback and PG) Twino guarantee payments even in the case of defaults or delays.
    - compiler-guy 9y ago
      That just shifts your risk to whether or not Twino succeeds. This may be lower risk than the original loans, but it is still risk.
- astura 9y ago
  That's not what "guaranteed" means.
  - akvadrako 9y ago

piracykills 9y ago

Wow, that's pretty crazy - ~5% bonds for conservative and ~7-8% for aggressive would have been more appropriate in my opinion. And I feel even those numbers may be a little optimistic. Currently it's more like "what if you have a great market year every year until you retire" or "what if you can reliably beat the market" - neither of which is likely to happen.

jonknee 9y ago
To be fair the total annualized return of the S&P 500 over long periods is roughly 10%. You don't have to reliably beat the market to reach those numbers. It's interesting to play around with: https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/
- teej 9y ago
  I think you forgot to click the “inflation adjusted” checkbox. The real rate of return is closer to ~7%. Also caveat emptor - past performance is no guarantee of future results.
  - jonknee 9y ago
    But the calculator you're criticizing does not adjust for inflation...
    - stochastastic 9y ago
      I think that’s the point. A projected savings balance is misleading without considering inflation, so if the calculator doesn’t make an explicit adjustment for it then there ought to be an implicit adjustment in the rate of return assumption.
  - Spooky23 9y ago
    Says who? Projecting historically low inflation is no less reckless than ignoring it. Imo, you're better off looking at absolute returns and tweaking your expectations based in inflation as itnhaopens.

gaius 9y ago

This effect of tiny changes having massive impacts is why Gordon Brown’s smash and grab raid on the private sector pensions, coupled with artificially low interest rates was so damaging and lead directly to the property bubble and the financial crisis in the UK.