More pie charts

Ok, so my original pie chart assumes a real return of 7%.  That’s a pretty high return.  If inflation was 3%, it would mean an average return of 10% over time.  That’s pretty optimistic (people think inflation will be lower… but 3% is a good historical average for the US).

retirement segments.PNG

But let’s say you will increase your savings every year.  This next chart would assume a 7% overall return (4% real return).  Or you could say it represents a 6% increase every year with a 10% return… We can see that early bias is less dramatic, but still very significant.

With 3%:

savings increase three percent.PNG

At a 7% increase in contribution per year, the contribution increases are matching the market returns, so everything evens out:  It is very difficult to achieve a 7% increase in savings, I think, especially in certain industries with capped pay scales.  Also, taxes will start to destroy you…

savings segments 7%.PNG

With 10%.  10% compounding is approximately my salary increase in the last 10 years.  Albeit, as I stated above, taxes have already destroyed my take home pay.  If I calculate this number with take home pay, the increase is only 8.6.  Put in a different way, the ratio difference is either 265% or 228%.

segments 10%.PNG

If you can achieve 10% increase per year, then your rate of pay increase exceeds market returns, and most of you nest egg will be earned at the end of your life, when you are a baller.  Presumably, if you are this smart though, you will be able to invest your money in ventures that exceed 7% real return, and so your chart will migrate back to one of the shapes above.

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