Non-intuitive Examples of Compounding Returns

Of course, nobody can reliably get 5.04% after tax and after inflation compounding returns. (And nobody was able to over the long term in the Twentieth Century in passive investments.) If you put your money in the stock market over the past decade, for example, your return would be zero. And this is one of the best times to be cashing out. Most of the last decade would have produced negative returns.

Less risky investments like government bonds typically return less than 1% over inflation. If you intend to save for retirement and hope to benefit from compounding, you should be prepared to depend on 1% or less returns. One percent returns will double your money in seventy-two years.

If you want to retire on more than Social Security, you should be prepared to save every penny you'd like to spend. Compound investment returns have always been unreliable and the development of modern finance may have eliminated those returns forever by shifting all gains to banking executives.

Social Security is doing much better by comparison. Or you could get yourself a government pension; those are insanely generous.

The point of the article is sound nonetheless: it is better to save early and consistently.

This simple lesson alone could help many young people avoid financial issues later in life.

Agreed.

While it is true that this kind of retirement savings is to some extent dependent upon good timing, what is clear is that if you have any ability to put compound interest to work - and I think that is relatively fair - it is much better to start early.

Even moderate rates of return will produce this kind of effect, and in that regard, I think it is a highly effective demonstration.

I give this same advice a lot, and it's always telling to watch people's reaction. Human nature is all about defending what you're currently doing, against all evidence that there's a better way.

So, yeah, it's impossible to get 5%? Are you sure about that? Over a 40-50 year period? You'd have to look pretty hard at old stock charts to find a spot where you could get overall returns that low.

And yes, inflation exists. It's probably still a good idea to save money for retirement though.

And yes, you're young and don't have as much money to spend. But you also are coming off a lifestyle where you shared a room with six guys and ate Costco ramen every meal for 4 years. As soon as anybody starts giving you money, it's money you didn't have before, so you absolutely can find a way to save it.

It's a lousy $1,000 per month. Figure out a way to stuff it into the market, and despite all your rationalizations, the 50 year old version of you will thank the 22 year old you.

Yeah, I've tried the whole stock market thing twice now. Put $1,000 in as a tracker against the market index, expected a decent return; of course, I put it in on Sep 10, 2001.

Never got that money back.

Thought I'd try again a couple of years ago, so I bought shares in Lloyds Group. On the eve of Lehman going south.

Never got that money back, either. I think I'll stick to 3% savings accounts, thanks.