Compound Interest Is A Lie | Hacker News Reader

Compound Interest Is A Lie

rationalconspiracy.com

12 pointsapsec1127 comments

Compound interest seems insignificant when framed as the author has framed it, but consider all the people held hostage by the compounding interest on their credit card debt.

For the normal working people the author describes, it's fairly unlikely that they'll end up "rich" using such a risk-averse investment strategy. On the other hand, it's also fairly unlikely they'll end up poor, which is the actual motivation for most retirement saving.

Some people end up seeking more risk and in some cases it pays off. Others happen to retire when the historical rate of return on their retirment portfolio averaged 8-10% per year and feel rich because of that. Still others die earlier than expected and will the money to their kids who now have a $1M nest egg from an early age and stand a chance of turning it into real wealth.

It is interesting to think about the extremely high value of public sector pensions, which are an under-the-radar transfer, extracted via the power of public sector unions and kept strong thanks to state-enforced monopolies.

The reason people are held hostage to credit card debt is that a) they don't declare bankruptcy, and b) frequent bankruptcy is priced in to the interest rates, which are therefore crazy high. If the bank is owed $1 million, half of that is never repaid due to bankruptcy, and the other half is repaid over three years at 30% annual interest, the bank breaks even or makes a small profit. But if you're in the half that repays at 30%, you're screwed pretty hard.

Bad article title -- compound interest is a simple truth. Investment counselors are the problem -- they try to claim they produce better results than simple, buy & hold investments (and they don't).

http://arachnoid.com/wrong/index.html#Investment

“$1.3 million for 25 years equals $52,000 a year.”

But if you only spend $52,000 a year, the money that’s left earns interest. With the 5% return assumption, you could spend a little over $92,000 a year for 25 years.

Accordning to the simple calculator at www.brkdirect.com, if you pay Berkshire Hathaway $1.3 million, they will guarantee a payment of $80,293 every year for as long as you live, assuming you are male, currently 65 years old, and living in Nebraska. If the annuity is bought with post-tax dollars, the after-tax amount will be $73,918 a year for 20 years and then $48,176 a year. Annuities are generally regarded as a bad deal for a variety of reasons, but this doesn’t sound bad to me at all.

thought the same thing. In addition, once you're retired you have social security and medicare to help out (let's assume for a moment that we'll actually collect ss and medicare, I don't want to get into that debate). When you throw those on top of 92k a year, and no longer have dependents at that point (you're retired), that's not a bad retirement amount. The real question is whether people can save 10k a year for their entire working life....

Sensational headline.

Sure, money managers have a significant interest in lying about their likelihood of outperforming market averages (6.6% real return in the last 100 years, by the way, not 5%), but their fees don't mean that "compound interest is a lie."

Compound interest isn't magic, it's just pretty simple math.

The title is inflammatory and misleading. The thesis of the article is that management fees hurt your investments' performance. (And a million dollars ain't what it used to be, but that's hardly news.)

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