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Comment by thaumasiotes | Hacker News Reader

> Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon...

Those flyers depend on a high-interest environment. At 1% annual interest (0.083% monthly interest), accumulating $1,000,000 by saving $75 / month would take just over 3,000 months, or 250 years.

Your deposits would only total about $225,000 over that time, so the "magic" of compound interest is still apparent, but it doesn't make for a compelling sales pitch.

"Quintuple¹ your money in just 250 years!

¹ Almost."

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To a reasonable approximation, no financial planner is telling anyone to sock away their money exclusively in a low-interest savings account. Stock historical yields are well in excess of 5%, which changes the math substantially. Even the 3-4% "secular stagnation" fearmongering that was all the rage five years ago improves the math substantially over the 1% figure you've chosen.

$75/mo is definitely too low for a realistic time horizon, though. $500/mo at ~5% for 45 years (e.g., working 20 to 65) gets you >$1mil, with 270k basis.[0]

[0]: https://www.investor.gov/financial-tools-calculators/calcula...

For what it's worth, a spare $500/mo is never going to happen. I think I was 33 before I had an extra $500/mo.

$500/mo is $6k/year. There are definitely people for whom that is not possible, but there are a lot of people for whom that is possible. If you work in software, odds are pretty good you're in the latter category, even at the start of your career. $1M as a target is chosen arbitrarily, and often people save less earlier and more later; it's a simplistic model. (As financial advice: you should still save, even if you can't save $500/mo.)

"Never going to happen" is probably overstating it.

If you had reduced your latté consumption by just 5 lattés per day you'd have had that spare $500.

That means I have to make and sell 4 lattés per day, which doesn't seem probable.

You just need to invest in an automatic espresso maker to have your 5 lattes a day at a reasonable price.

But this is all thinking from an American perspective. Plenty of other countries with higher interest rates in the range of 7 to 9 percentage from banks and double digit from the share market.

I do wonder why don't more people move in to the third world from the West, it makes a lot of sense I think, especially if one is looking for financial independence. In third world, generally the same amount of money goes much longer than in the West.

> In third world, generally the same amount of money goes much longer than in the West.

There are some things that just cannot be purchased in the third world, though. Stability, a well educated population, a fair court system, confidence in the institutions that supply infrastructure (roads, trains, bridges, water, electricity, etc.), low perceived corruption, confidence that property rights will be upheld, high trust low friction transactions, and so on.

There's definitely variance between the different first and third world countries, and all countries have their pros and cons, but some things can definitely not be purchased with money.

> Plenty of other countries with higher interest rates in the range of 7 to 9 percentage from banks

Technically, only interest rate above inflation is interesting though. Might be 8 pct at high inflation still wins out, though.

> and double digit from the share market.

I'm curious about this - we're are these emerging markets? I suppose the Asian Tigers have slowed down a bit? Parts of Africa and South/Latin America?

My original comment was in dollars in response to a comment in dollars; we've been talking American perspective the whole time.

I don't think it's as reasonable to make 45-year compounding interest models for retirement in 3rd world economies. There's just a lot more going on as far as stability, interest rates, personal safety, etc. You can still do it, but I don't know if the numerical result tells you anything.

Well they've gone from using their savings accounts in the calculations to just putting everything into the stock market, usually the S&P 500.

Its a win-win - they get to charge higher transaction fees and management fees if its their own product, and the recent bull market makes the customer think they're going to get 7% returns forever. Just as long as they don't need to withdraw their money during a recession.

The worst-ever 20-year return for the S&P 500 index was +6.4% per year. It’s not the recent bull markets convincing investors that 7% returns will come forever. It’s a long history of such returns.

https://www.thebalance.com/rolling-index-returns-4061795

(Obligatory remark about the Nikkei's last 30 years)

Exactly. We are fooling ourselves if we think that the S&P 500 is immune to being in a bear market.

That data looks at January 1979 to present. I believe ever includes the rest of the 20th century as well...

There was certainly a negative return over 20-year periods including the Great Depression.

And negative real returns during the 1970s stagflation.

It's also only looking at the US, cherry-picking a country that has had an unusually good run of stability for the past few centuries.

Ask Germans or Russians what the worst rate of return for a 20-year period was in their country.

The S&P 500 just didn't exist before 1957, so it can't say anything about back then. Remember S&P 500 is actually a specific (actively-managed!) large cap index.

I'm not sure what the return on all US stocks is since then, but Japan's market has only just returned to the level it was at in its 80s bubble.

Right, there was an index in place during the Great Depression for sure. From wikipedia: https://en.wikipedia.org/wiki/S%26P_500

History

In 1860, Henry Varnum Poor formed Poor's Publishing, which published an investor's guide to the railroad industry.[20]

In 1923, Standard Statistics Company (founded in 1906 as the Standard Statistics Bureau) began rating mortgage bonds[20] and developed its first stock market index consisting of the stocks of 233 U.S. companies, computed weekly.[1]

In 1926, it developed a 90-stock index, computed daily.[1]

In 1941, Poor's Publishing merged with Standard Statistics Company to form Standard & Poor's.[20][21]

On March 4, 1957, the index was expanded to its current 500 companies and was renamed the S&P 500 Stock Composite Index.[1]

1929-1948 gave investors a +0.6%/year, which I think is the lowest nominal return. 1962-1981 was +0.8%/year.

As you allude, there were 20-year periods spanning the 1970s where Treasuries outperformed large-caps, but that’s fairly rare (and with the printing presses running three shifts, something we’re in extremely little danger of right now).

You just need to freeze yourself for 1,000 years..

https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s

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