Is saving/investing actually a crappy way to get rich?

[Anonymous]

Surely you can 'risk' $50k and put it in growth stocks. I turned $50k into $300k in three years. I also double my Roth account in three months this year, and made 20% since last week. You are clearly not in charge of your own investments.
$50k is my yearly income at work. I don't think I have high risk tolerance, but what I read, all says that I do.
The risky part is not to investing in growth and work til the day I die.

[Anonymous]

Most people who can retire at 52 started investing way earlier than 32. Or they have pensions. Plus a lot of those teachers and others with pensions get another job after "retirement."

[Anonymous]

Anonymous wrote:I was just running some numbers in an investment calculator and, frankly, they’re a little depressing. I’m in my early 30s, single, and have finally gotten my income to the point that I make $210K, am debt-free, and I’m able to save $100K per year.

Even saving at that level, which seems like a huge amount, I have to work for decades and would still have to live a modest lifestyle if I retire semi-early.

In the calculator, I assumed 8% returns, 3% inflation, and a 15% tax rate on my investments. With those assumptions, $100K per year invested for 20 years becomes $2.36M in today’s dollars (it’s almost $5M in nominal terms, but of course, that means nothing).

Using the 3% rule at that time, that means I can pull out about $70K per year to live on, which is not that much more than I currently spend trying to live a frugal lifestyle and stack my investments heavily. And of course, that assumes that I stay in relatively good health so I can afford my own insurance and medical bills before Medicare. Throw kids into the picture, and thoughts of early retirement would be over.

I don’t know – that seems kind of…underwhelming. I guess I always thought that saving $100K would be a fast track to riches. But now, more and more, it seems like you really need exorbitant incomes or significant risk-taking/entrepreneurship to be able to live a really good life at a relatively young age. Am I out of touch here? Missing something? Thoughts?

You are better off looking at nominal numbers for assets and adjusting withdrawals for inflation.

For example, your savings (assets) would be $5M in nominal terms. Assuming you need $100K now, inflation adjusted you'd need $180K in 20 years. If you were to withdraw 4% from your $5M, that's 200K. Adjusting that for a 15% tax, you are left with $170K. Not that far off from your spend requirement.

[Anonymous]

Look into FIRE. Sounds like a path you might prefer.

[Anonymous]

Saving and investing conservatively is not a way to get rich. It a way to have enough for a good quality of life when retired. To get rich you need hustle and luck and initial capital helps.

[Anonymous]

^^ PP again. I started working at 30ish. Never made more that $400K as a family (for about 5 years maybe) and had many years of unemployment for one of us. We are now 59/54 and have about $8M. Five years ago (54/49) it was about $5M (your target number). Current HHI is about $250K. Also, markets return more than 8% on average. If inflation is higher, returns will be higher as well.

[Anonymous]

Anonymous wrote:^^ PP again. I started working at 30ish. Never made more that $400K as a family (for about 5 years maybe) and had many years of unemployment for one of us. We are now 59/54 and have about $8M. Five years ago (54/49) it was about $5M (your target number). Current HHI is about $250K. Also, markets return more than 8% on average. If inflation is higher, returns will be higher as well.

I'm the 8:55 pp

[Anonymous]

Anonymous wrote:^^ PP again. I started working at 30ish. Never made more that $400K as a family (for about 5 years maybe) and had many years of unemployment for one of us. We are now 59/54 and have about $8M. Five years ago (54/49) it was about $5M (your target number). Current HHI is about $250K. Also, markets return more than 8% on average. If inflation is higher, returns will be higher as well.

You bought a house and stock in the 90s; if you had capital that was your secret sauce.

[Anonymous]

I'm 50 and my husband and I have a net worth of $3M and he can retire in 5 years with a government pension. I think we have managed to get pretty rich saving/investing, since we have:
-- a house (owned outright) worth $1M because we bought a small/old starter home, never traded up, refinanced from 7% all the way down to 2.75% as rates went down, made improvements out of our income, and took advantage of appreciation
--a 401(k) worth $1M earned through contributions that I increased from probably $500 or $1000 a year when I started working to the maximum in the last 5-10 years (as kids got older), which have grown
--my spouse's 401(k), which has grown to $1M the same way
--no school debt (law and business school) since we aggressively paid both off in 10 years by not overcommitting to housing costs

He can retire while I still work since we paid off the house, he can collect his pension at 62, we can start 401(k) withdrawals at 65, and wait to 70 to collect SS. We will be pulling down something like $200K a year just in pension, SS, and minimum required withdrawals. Seems like plenty for 2 people.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I was just running some numbers in an investment calculator and, frankly, they’re a little depressing. I’m in my early 30s, single, and have finally gotten my income to the point that I make $210K, am debt-free, and I’m able to save $100K per year.

Even saving at that level, which seems like a huge amount, I have to work for decades and would still have to live a modest lifestyle if I retire semi-early.

In the calculator, I assumed 8% returns, 3% inflation, and a 15% tax rate on my investments. With those assumptions, $100K per year invested for 20 years becomes $2.36M in today’s dollars (it’s almost $5M in nominal terms, but of course, that means nothing).

Using the 3% rule at that time, that means I can pull out about $70K per year to live on, which is not that much more than I currently spend trying to live a frugal lifestyle and stack my investments heavily. And of course, that assumes that I stay in relatively good health so I can afford my own insurance and medical bills before Medicare. Throw kids into the picture, and thoughts of early retirement would be over.

I don’t know – that seems kind of…underwhelming. I guess I always thought that saving $100K would be a fast track to riches. But now, more and more, it seems like you really need exorbitant incomes or significant risk-taking/entrepreneurship to be able to live a really good life at a relatively young age. Am I out of touch here? Missing something? Thoughts?

I think what you're doing feels underwhelming because you're heavily restricting yourself to just save 100K so essentially you're suffering for 20 years for barely any outcome.

But also, your math is wrong. You end up with 3.4M after accounting for inflation. Further, accounting for 15% capital gains means that, you take out 4% of 3.4M (136K), but you'll only see 85% of it (115K).

Not sure what you did for your math. Did you assume that you'd be paying capital gains every year or something? You only pay capital gains when you sell, which I assumed would only happen at the time of you actually withdrawing the funds.

Yes, it takes out 15% for taxes every year. It's a basic phone app so it's obviously flawed, but I figure I'll probably be doing some Roth so will be taxed at ordinary income the first year for those. Some brokerage since I want to retire early -- even though I'm only paying taxes on dividends/cap gains, it's 15% plus 8% for MD. Plus, if I factor in a lot of pre-tax contributions, then at early retirement, I have to pay ordinary income tax on my meager $70K of withdrawals. Overall, these are just approximations/back of the napkin numbers.

I think you should try to actually model it out using excel or Google sheets, rather than an app, so you can control every input. It should only take 30 minutes to one hour if you keep the inputs simple (e.g., the inputs you laid out here, inflation %, return %, taxes, and 100K a year of contributions). While you note that withdrawals on pre-tax contributions will require you to pay income tax, you don't need to pay the capital gains tax when you sell them in the interim (i.e., you want to sell a stock because you think it's going to go down and then reinvest it somewhere else during the 20 year period). Thus, it's actually quite worth it to use a pre-tax account.

In Washington DC, if you withdraw 70K a year from your traditional 401k, you'll only pay around 18% in average income taxes. This is less than if you earned 70k in wages, because you don't have to pay social security or Medicare taxes on income that's not wages (I'm 70% sure this is the case). This is barely higher than paying 15% in capital gains tax, and you used pre-tax dollars to get this result, meaning it's actually better.

I understand that you came into this knowing that your app's calculations could be off, but in my opinion, it's too inaccurate. It literally gave you a number that's 2/3rds the outcome you were actually going to get.

[Anonymous]

Anonymous wrote:To answer your question: Yes.

Entrepreneurship is the path to riches.

I agree with this though I'm happy to work for the man for 40 hours a week to be comfortable, not rich.

[Anonymous]

OP, you are totally right. You can’t save and invest your way to riches on a MC/UMC salary.

What saving and investing allows you to do is maintain your lifestyle in retirement, not to get much richer.

Even if it makes you rich, it won’t be at a young age. You would be very old.

You could become rich by investing if you take amount of risk and gets lucky.

People disagreeing with you here are actually making your point.

One poster said that 20 years wasn’t enough. Even if you save/invest for 30 years as OP does, it wouldn’t make him rich. He would have a bit more, but won’t be rich.

If you want to save and invest your way to riches on a salary, you need to save/invest a lot more, and for this you need a much higher income.
OR, you gamble and cross your fingers to get lucky.

Entrepreneurship can make you rich and even at a young age.

*The standard saving, 401k, index funds investing won’t make you rich. It will help you maintain your lifestyle when you retire, or perhaps improve it slightly. *

[Anonymous]

Anonymous wrote:To answer your question: Yes.

Entrepreneurship is the path to riches.

+1

[Anonymous]

Anonymous wrote:The expectation you can work for 20 years and then not work for 30 or 40 off savings from those 20 is a little ridiculous.

It’s also why saving *anything* in your 20s is highly recommended. And why I plan to give my kids a brokerage account with a couple hundred thousand dollars when they graduate college.

Yes, I agree it’s not the norm, but it’s also not the norm to save ~50% of a decent salary. What’s the average salary of someone who saves $100K per year? My guess would be probably around $400K. I really thought I’d be able to “jump the line” by saving more aggressively, and it’s disappointing that this may not be the case.

Though, as others have said, it’s very possible that my simplistic calculations on the app are incorrect. I’m going to run the numbers on a more detailed program when I have the time. Or if any of you Excel wizards would like to help me out, I would greatly appreciate it – $100K savings per year (with slightly higher contributions each year to account for inflation-matching salary increases), 20 years, 8% return, 3% inflation, and a reasonable approximation for taxes along the way.

To the PP that said that my numbers must be off because $100,000 x 20 = $2 million alone with no growth, that’s true if inflation and taxes don’t exist—but so much of investing seems to be about just keeping ahead of those two things.

[Anonymous]

Anonymous wrote:To answer your question: Yes.

Entrepreneurship is the path to riches.

Most entrepreneurs fail. The real answer is winning the genetic lottery or being able to marry into money