7 ms·

> My favorite example is... This exact thing caught me out a few weeks ago, it still boggles my mind. I started a pension recently and I was given examples of

> My favorite example is... This exact thing caught me out a few weeks ago, it still boggles my mind. I started a pension recently and I was given examples of how much I would be worth if I started as soon as possible (my 21st birthday) or if I waited until I was 22, 23, 24... if my total monthly contributions are $2,000 and I start on my 21st birthday I will be worth hundreds of thousands of dollars more than if I started at 23, or 25, but my brain thinks that is insane and even though I know it's true, I still can't get over it. The difference between 21 and 23 is $160,000! going even more on a tangent, it's really a great shame this sort of thing isn't taught in schools. It seems obvious now after being taught that savings can vary so much this way with so little time, but until I was explained it I had no idea. I figured waiting until 25 or 30 to start a pension made most sense!

keithpeter 14y ago
The contribution from your first year is earning interest for N years, so contributes (1 + R/100)^N (assuming fixed rate R, which is a fiction. That could be a lot of dosh...
jerf 14y ago
Those estimates are often wrong though, because the idea of annual 12% returns is complete fiction. In fact the idea of any particular percentage annually is fiction. For instance, I only recently started a pension, however if you look at the stock market history (for simplicity), had I started in 2000, the net gain I could have expected was almost precisely zero, if not negative. If I could have found something that paid 12% from 2000 to 2012, sure, I would have missed out on a lot, but there in fact not only was no such beast (in the broad sense), there was also a lot of ways to experience negative gain. This is one of my favorite visualizations ever: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110... Be sure to carefully read what it is actually visualizing; I've posted this a couple times and people often knee-jerk a reaction to it based on a complete misreading of the chart.
- twoodfin 14y ago
  In the context of this discussion (and indeed as reflects how most people invest), wouldn't it be more relevant to see the average rate of return assuming regular (inflation or income growth adjusted) annual investments?
  - snowwrestler 14y ago
    Exactly. Depending on volatility you could get a positive return investing a set amount in a stock regularly, even if the stock started and finished at the exact same price. In addition some stocks pay dividends; reinvesting these can also improve rate of return beyond what would be expected from just looking at the stock price.
- itry 14y ago
  Interesting chart. Strange, at one point it says "High inlfation led to negative returns". When money is worth less, then you get more money when you sell something. In this case your share of a company. So why would the returns of investing in the S&P be affected by inflation?
  - ksherlock 14y ago
    Inflation doesn't inflate everything at the same rate. In 1970, the DJIA was $809. 10 years later, it was $824. Inflation was more than 1%.
  - zdrummond 14y ago
    Because the nature of inflation is to devalue money. For example, let's say you put $10k under your bed to buy a car for your kid when they turn 18, and let's say inflation was at 2% for those 18 years. Now the 18 years have speed buy and you go grab your very old stack of $10k from under the bed frame to celebrate your kid leaving the house. When you get to the car dealership, you find the equivalent car you could have purchased now costs $14,282. Your money has lost almost a third of it's value just by inflation.
  - mikeash 14y ago
Dove 14y ago
Starting early is only half the battle. The other half is the rate of return. If you start up a retirement account at age 17 with $2000 in it, but you just put it in a generic savings account, by age 37 you'll have . . . $2209. People encouraging you to save often give unrealistically high rates of return. 12% is unrealistic for any investment vehicle I know of (though people sometimes say it for the stock market -- but they're crazy optimistic). Here's a spreadsheet to show you the impact of both rate of return and time: https://docs.google.com/spreadsheet/ccc?key=0AqTfjQUnJdLkdFl2eGJhdmpoaF9fM2ZmNmJZNjJGcmc https://docs.google.com/spreadsheet/ccc?key=0AqTfjQUnJdLkdFl...
- Dove 14y ago
  And of course, that doesn't account for the risk of the investment -- which, as a lot of people discovered in 2008, is a real, actual thing.
- barrkel 14y ago
  Indeed. These days, money in a savings account has a negative real rate of return.
  - aqme28 14y ago
    That depends 100% on your timeframe. Start investing in March '09 and your money would have doubled in less than three and a half years.
    - mikeash 14y ago
      "Savings account."
eCa 14y ago
You are not alone: www.youtube.com/watch?v=F-QA2rkpBSY

keithpeter 14y ago

The contribution from your first year is earning interest for N years, so contributes (1 + R/100)^N (assuming fixed rate R, which is a fiction. That could be a lot of dosh...

jerf 14y ago

Those estimates are often wrong though, because the idea of annual 12% returns is complete fiction. In fact the idea of any particular percentage annually is fiction. For instance, I only recently started a pension, however if you look at the stock market history (for simplicity), had I started in 2000, the net gain I could have expected was almost precisely zero, if not negative. If I could have found something that paid 12% from 2000 to 2012, sure, I would have missed out on a lot, but there in fact not only was no such beast (in the broad sense), there was also a lot of ways to experience negative gain. This is one of my favorite visualizations ever: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110... Be sure to carefully read what it is actually visualizing; I've posted this a couple times and people often knee-jerk a reaction to it based on a complete misreading of the chart.

twoodfin 14y ago
In the context of this discussion (and indeed as reflects how most people invest), wouldn't it be more relevant to see the average rate of return assuming regular (inflation or income growth adjusted) annual investments?
- snowwrestler 14y ago
  Exactly. Depending on volatility you could get a positive return investing a set amount in a stock regularly, even if the stock started and finished at the exact same price. In addition some stocks pay dividends; reinvesting these can also improve rate of return beyond what would be expected from just looking at the stock price.
itry 14y ago
Interesting chart. Strange, at one point it says "High inlfation led to negative returns". When money is worth less, then you get more money when you sell something. In this case your share of a company. So why would the returns of investing in the S&P be affected by inflation?
- ksherlock 14y ago
  Inflation doesn't inflate everything at the same rate. In 1970, the DJIA was $809. 10 years later, it was $824. Inflation was more than 1%.
- zdrummond 14y ago
  Because the nature of inflation is to devalue money. For example, let's say you put $10k under your bed to buy a car for your kid when they turn 18, and let's say inflation was at 2% for those 18 years. Now the 18 years have speed buy and you go grab your very old stack of $10k from under the bed frame to celebrate your kid leaving the house. When you get to the car dealership, you find the equivalent car you could have purchased now costs $14,282. Your money has lost almost a third of it's value just by inflation.
- mikeash 14y ago

Dove 14y ago

Starting early is only half the battle. The other half is the rate of return. If you start up a retirement account at age 17 with $2000 in it, but you just put it in a generic savings account, by age 37 you'll have . . . $2209. People encouraging you to save often give unrealistically high rates of return. 12% is unrealistic for any investment vehicle I know of (though people sometimes say it for the stock market -- but they're crazy optimistic). Here's a spreadsheet to show you the impact of both rate of return and time: https://docs.google.com/spreadsheet/ccc?key=0AqTfjQUnJdLkdFl2eGJhdmpoaF9fM2ZmNmJZNjJGcmc https://docs.google.com/spreadsheet/ccc?key=0AqTfjQUnJdLkdFl...

Dove 14y ago
And of course, that doesn't account for the risk of the investment -- which, as a lot of people discovered in 2008, is a real, actual thing.
barrkel 14y ago
Indeed. These days, money in a savings account has a negative real rate of return.
- aqme28 14y ago
  That depends 100% on your timeframe. Start investing in March '09 and your money would have doubled in less than three and a half years.
  - mikeash 14y ago
    "Savings account."

eCa 14y ago

You are not alone: www.youtube.com/watch?v=F-QA2rkpBSY