16h ago

Why aren't we all getting rich from compound interest?

Just let your wealth compound over time and you'll be a millionaire, the advice goes. If this is true why aren't more people rich?UNDERSTAND, SHARE & PUSH BACK

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I don't want to watch the 20 minute video but yeah, I started 30 years ago when it was possible to pay rent and put aside a little. I'm no longer putting any aside, my $75k a year job just keeps the lights on now
Millionaire doesn't even feel very rich these days. I can't retire right now but I'm worth a million bucks
- Could you elaborate on that? At $1 million, that would be your yearly salary for over 13 years. At 5% yearly interest (from something like Discover) would generate $50k/yr. Why would you not be able to retire?
  
  lol. 5% interest is a rarity now. The moment it starts approaching that, interest rates get cut. It never lasts. Discover is currently at 3.7%.
  
  Could you elaborate on that? At $1 million, that would be your yearly salary for over 13 years. At 5% yearly interest (from something like Discover) would generate $50k/yr. Why would you not be able to retire?
  I'm not the poster you're responding to, but I've know the same math they used.
  Here's the flaws in that argument. 5% interest is possible today in some money market accounts, but there was about a 17 year gap between now and the last time it was 5% was in 2007. These interest rates have a high correlation to Treasury Bills. So you can't count on getting that 5% on the regular over the 40 years of your working life. Here's a graph of the T-Bills yields over time.
  Even if you could, inflation will eat away at the value of your money especially over decades. So while $50k/year sounds like a decent amount of income in retirement, you'll need substantially more money to maintain the same buying power. Example:
  "$50,000 in 1995 is equivalent in purchasing power to about $104,222.77 today, an increase of $54,222.77 over 30 years. The dollar had an average inflation rate of 2.48% per year between 1995 and today, producing a cumulative price increase of 108.45%." source
  And that example is only over 30 years.
  That poster is right. Being a millionaire these days doesn't feel rich. This is especially true with the current administration attacking the social safety net with new restrictions on Medicaid and now Social Security is in his crosshairs. Lots and LOTS of us are going to be totally screwed in retirement. Even those that have enough for themselves and their immediate family are likely going to be sharing that with a close circle of extended family or friends to keep them out of starvation and exposure to the elements from poverty. None of us except the ultra wealthy are going to have a safe and happy retirement.
  
  Yes that's the last 30 years though. I'm not talking about past profits, I'm talking about the future. They seem to currently have enough money to secure at least a decade of spending even before taking interest into account.
  
  Just don't live longer than a decade, don't experience inflation, and don't grow old and infirmed.
  
  I feel like I'm not being clear then: that's ONLY taking into account the potential interest earned? Touching the principal, you'd be able to go for much longer. This is coming from a place of ignorance and envy as as American with no prospect of being able to save $1 million, ever.
  
  I feel like I’m not being clear then: that’s ONLY taking into account the potential interest earned? Touching the principal, you’d be able to go for much longer.
  This is the gamble though. The rule of thumb is a 4.7% safe withdraw rate. Once you retire, you've earned all the income from wages you'll ever earn. What money you have saved will have to last you the rest of your life which is an uncertain amount of years with uncertain expenses. You can stack the deck in your favor by doing such things as owning your home outright, but that doesn't shield you from the sky high cost of eventually having to move into an assisted living at today's cost of $6000/month. Who knows how much that will cost in the future? So your $50k/year is completely exhausted by the first week of August having not spent another cent on anything. You'll have to dig into your principle to make up the difference.
  
  It's just not safe. If I was on my own, me and my dog could ride into the sunset right now. I'm the main earner in our family, my wife takes care of the household and earns about $25k a year. Three kids, two in community college and we're paying for it so there's not even a little debt for them to start out.
  I need a new truck and it would be a stretch to buy a used one right now.
  
  Yeah I see, that's fair enough.
  
  Kids.
  Plus, $350k is just equity in my house.
  edit: I guess I shortchanged my wife in that statement. We are full partners so half of it is hers
  
  I have not gotten anywhere near 5% interest the last 15 years. Best I did was around 3% and there have even been years with negative interest
  
  I have received 5% at least the last few years, but even disregarding the last I'm talking about future spending.

32 comments