Let’s assume you’re an average performer. Your income is between poverty line and maybe upper bracket middle management. Nothing special about you. Now let’s say you’re not given to excesses, and you’re able to put aside 10% of your gross pay just before the next one. After 40 years of working and saving, you would have an amount roughly equal to 4 years of your current income, less if you put it in a hopelessly low interest-earning deposit. As a consolation, you retired without any undue financial encumbrances so your money’s clean and all yours. There’s also the matter of your retirement benefits and pension, but that will be for recurring expenses while you’re alive.
So, you have 4 years worth of income. To me it will be a small fortune but nothing impressive. A retired manager will probably receive much more. Watcha think?
You’re drastically underestimating the time value of money. Sure, if you just stuff 10% of your salary into a mattress then in 40 years you’ll have 4 years worth of salary saved up–less in real terms with inflation. (Or rodents getting into your nest egg.)
But even if you do something ridiculously conservative like invest all the money in an investment grade bond index fund, you’ll be looking at more like ten years of your annual salary at the end. A more realistic long-term investment vehicle, like a large-cap stock index fund (e.g., an &P 500 index fund), could easily turn that into twenty years of your annual salary. (All this is ridiculously oversimplified, ignores taxes, and doesn’t take into account changes in your annual salary over the course of your career.)
Don’t know if I’ll die rich, but I’m proof you can get rich by just saving.
I’m rich, somewhere in the top 3 or 4%, depending on the calculator. I didn’t get an inheritance, a trust fund, an IPO, or win a lottery. I did it entirely by saving. Just lived well below my means and invested carefully for 35 years. I’m nearing retirement, and am now (literally) shopping for a yacht*.
Defining “rich” is always tricky, and I’m not going to try. 10% might not do it, depending on how much you make. But the earlier you start, the likelier it is. I think I’m putting away about 15% now, plus a 6% employer match.
In addition to the above advice, delaying having children can make a difference. Although IME you’re likely to spend more on them when you have more to spend on them. But early investments pay off better. I was able to put away $5k/year into my IRA in my 20s, when I was only making $25k/year. Poor zipper control would have made that impossible.
I hope that with good financial management, I won’t have to worry about spending my elder years completely broke. I hope I can get health care, a comfortable place to live, and the occasional indulgence.
I got into Government service in time to be vested in the original retirement plan, which should give me about 75% of my current earnings. I also invested in the ‘new’ retirement plan, basically a 401k, which should add another 8%. This cost me 12% of my gross pay every payday for 30 years.
Besides that, I’ve got Mutual Funds that I’ve added to monthly for 20 years, several CD’s in the bank, I bought Savings bonds (now cashed) by payroll deduction, paid of my mortgage early…
So not in the yacht-buying range as above, but I’ll be making close to what I make now and be able to do the travel and home upgrades I have been planning on and still save for a rainy day–and have this budgeted up to age 90.
Considering your retirement could last 40 years or more, 4 years’ worth of income is a very, very small fortune. You’ll (probably) be receiving social security disbursements, which may amount to a perhaps a quarter of the salary you made while you were working. Maybe you’ve also got a pension, maybe not, depends on where you work. So you may find yourself trying to get through your golden years on 35% of the salary you earned while you were working. While you were working you were probably paying 25% of your salary in taxes every year, which means you used to be living on 65% of your salary. Dropping from 65% to 35% is pretty harsh, even assuming your house is paid off. You will definitely not die rich, and you may even die penniless if you’re not very careful.
Investing solely in bonds will barely keep up with inflation, preserving the real value of your nest egg, but it won’t make you richer. My friend’s parents were in this situation: they saved scrupulously over their lifetime, but since they invested almost exclusively in bonds, their money accumulated but it never really grew. They’re getting by (because they saved more than 10% every year), but they’re not exactly in the jet set.
If you want to die rich:
-save early
-save a lot
-invest exclusively in equities
There’s some risk in that strategy. Your nest egg will probably be quite large, but it could also end up very large (a slightly better outcome), or very small (a disastrous outcome), depending on how the economy does over the next few decades.
If you want to reduce that risk of a disastrous outcome (at the expense of reducing the probability of an outlandishly large nest egg), look in to portfolio rebalancing. Your nest egg will probably end up slightly less small than in the previous scenario, but it will also have a much, much lower change of ending up disastriously small.
I like Vanguard’s Target Retirement funds for this purpose. Each one has a target year and starts out mostly equities, then rebalances towards debt as it gets closer and closer to the target retirement year.
If you work 40 years a never get a raise, invest 10% per year, and get 5% a year then at the end of 40 years you will have 12.5 years of salary saved. If you get 6% then you will have 16.25 year of salary saved.
It all depends on the amount of return you get and how much you earn each year.
I don’t save so that I’ll die rich. It is so that I’ll be able to support myself and my wife in my later years of life without working and relying on anyone else before I die.
The OP seems to be suggesting a scenario that does not involve investing - just stockpiling cash in a mattress. That’s the only conceivable way you could end up with just 4x annual salary at the end of your working years by saving 10% for each of 40 years.
Unless your annual income is far more than your expenditures (such that your annual savings rate is more like 90%), investing heavily (albeit not entirely) equities is the only way to ensure you don’t have to scale your spending habits way back when you retire.
I think that “saving so that I die rich” is shorthand for “building a nest egg big enough so that I can live well in my retirement AND be ready for any contingency, e.g. living to 105 and needing a 24-hour caregiver for the final 20 years of my life.”
My parents saved (and invested) enough so that they will probably die rich. They enjoyed extensive global travel for the first ~10 years of their retirement, and now that their health is declining, they still have more than enough assets to afford residence in a nice assisted-living community, even if they live to 105.
There was a local radio commentary on this. The speaker said if you are coffee drinker (I’m not) and partake in a daily coffee from Starbucks or similar, every day, for forty business years, you are drinking away $400,000. The speaker said to go buy an automatic coffee maker and a thermos. Make it at home and bring it with you in a thermos.
If I were a coffee drinker, I would have been doing that years ago. But I’m not a coffee drinker and I’ve saved that kinda daily cash outlay anyway. And then some.
Those things typically have high management fees. You can do better by investing according to your desired level of risk and making sure to rebalance from time to time. Plus, given our life expectancies, putting too much in “safe” investments at 65 is not a good idea, since you’ll start losing value against inflation.
I’ve saved about 10% for 35 years, and now have 10X my salary which has gone up over 4X over that time. And we have tons of equity in the house. The secret is to keep saving, don’t waste money on junk, and to not get laid off.
The book that addresses this exact thing is called The Automatic Millionaire. It has a story about a couple, who lived a middle class life and income, but they saved money their entire adult working lives and retired easily. I think they retired before the age when you can collect Social Security benefits, like in their 50s.
So I don’t believe you are doing the math correctly or using the right source for it. 40 years of compounded interest is a long time. Using the formula for the last four years time gross salary, anyone is going to come up short.
If you only need $30k a year to live off, its far easier to be financially independent (does that mean wealthy? You sure wouldn’t live like you were rich, but $30k a year is certainly a liveable income) than if you need $150k a year to live off of.
Want $30k a year at a 4% safe withdrawal rate - that’s $750k in savings. Not difficult if you save early and use the power of compound interest - in fact, a lot of people retire early because they only spend $30k a year and save the rest. Want $150k a year - you need $3,750,000 - that would be a lot harder for your average income earner to amass over 40 years - but you’d be very comfortable - although likely still not able to travel extensively in Europe and still have enough money to live to be 100 in a nice nursing home - so perhaps still not “rich when you die.”
(A two earner household might bring in another $40k a year in Social Security on top of that $30k, which would make for a comfortable retirement until you get to the assisted living stage of life.)
(Buy a huge TV! Travel from the UK to Vegas! Go on a cruise!)