Quote:
Originally Posted by Dedekind  Consider this fact: If you save $110 each month from age 20 to age 65, you will retire a millionaire (assuming 10% rates). |
Personally, I wouldn't try this! Don't forget about inflation. I did a quick calculation based on a 3% inflation rate year-to-year (which is a very conservative estimate). Even though you'd have $1,000,000 by age 65, in 45 years $1,000,000 will have the same purchasing power as about $254,000 today. And again that's based on a small inflation number. If you assume 4% inflation then you will have the purchasing power of just $159,000 today.
Instead, personally, I think it is a much better idea to save based on a percentile of your income. Personal finance gurus, for example, usually suggest saving 10%. The bonus of this approach is that as your earning power grows (raises, promotions, career development, ventures) your savings go up. In fact, since a semi-ambitious worker will tend to get raises which keep up with or outpace inflation, this approach makes a lot more sense.
Some people suggest you save more, 15% is great, 20% is the goal which my partner and I set each year, but this requires a lot of delayed gratification for a bigger, faster payoff.
Finally a percentile approach also provides us a similar cognitive freedom as the one you described (feeling as though you can now spend the rest of your money as you please). We simply aim to get 20% of all income moved into investments as quickly as possibly (preferablly automatically) and everything else is "free to spend" on essentials and discretionary spending.
Laters
