If I had a nickel for every time I heard this advice… I would pay them to STFU!
How many times have you heard this?
“If you’re 25, you only need to invest about $3,600 per year to end up with $1 million by the time you’re 65 if your investments return 8 percent per year.”
My personal favorite time I heard this advice was from debt collectors – warning us wayward high school seniors that if we didn’t take our personal finances seriously, we’d lose everything. They then put up a chart describing compounding interest rates on an overhead projector and gave us the aforementioned advice.
I’ve heard it at least once a year, with the percentage varying everywhere from 7% to 12%.
But… if you’ve ever opened up a savings account or considered a short-term CD at your local bank, you might have noticed the numbers didn’t seem to be in your favor. According to BankRate.com, most savings accounts – if they even offer interest anymore – offer interest of around 1%. The highest I’ve seen is ING, at close to 3%. What’s worse, the average return on a 5 year CD is less than 3%.
So where the hell does this magical 8% interest rate come from? You guessed it. The Stock Market. Everyone knows that the stock market returns an average of 8%.
Your Attention Please: It is complete and utter bullsh!t – the stock market’s average return is NOT 8%.
The average return over the last decade of the Total Stock Market Index Fund was 3.5%, while the International Stock Market Fund returned 7.1%, according to Money. Averaging the two you get around 5%, which – in case you weren’t paying attention – is not the 8% we’ve been told we need over and over and over again. And, by the way, is only 2% past Inflation… Over the last ten years one could reasonably expect to make 5.5% returns from an annually balanced portfolio on the market.
The goal of having $1 Million by investing responsibly starting at 25 and proceeding on to 65 is a pipe dream. Short of a minor miracle, insider trading, or bedding someone with a hot stock tip, it’ll probably never happen for the majority of us. What’s worse – the “returns” we’ve been told to look for often do not include trading fees or other “gotchas”.
In the interest of full disclosure, I’m not a finance person. I know that the market works in cycles, and someone out there is bound to prove me wrong on some detail here or there, but come on. When you have a nation of people who’ve been told over and over again that they can have a million dollars by the time they’re 65 if only they put away $300 a month, don’t you think we’d have a whole lot of rich people by now? Or at least, more than there are? Why is it that we never get an explanation of where that 8% is supposed to come from?
I call bullsh!t!