First major flaw in your math is using life expectancy from birth (78 years). If you die from a childhood disease, retirement is not a big concern of yours. You should use life expectancy from 65. According to the SSA, life expectancy from age 65 is 17 for men and 20 for women.
The second major flaw is the $2 million figure. The $2 million assumes earning 5% interest and you needing $100K a year in retirement, and not touching the principal.
Or.. I suppose… 2% return and you needing $40K a year, without touching the principal.
How much would you need at .1% interest and needing $30K a year to supplement SS? $30 million?
Median household income is $50K. Assuming you were able to save 5% per year ($2500) and earn 2% above inflation (yeah, right), then at the end of 40 years you would have $154K.
Assuming you could continue to make 2% above inflation, and not touch principal, you would be earning $3K a year on your savings.
25% a year savings would increase this to $768K at the end of 40 years. 50% savings would net them $1.5M. They would have to save a full 66% off their income, for 40 years, and make a constant 2% above inflation, to have the equivalent of $2 million.
Of course, then, assuming 5% return, they would be making $100K a year in retirement, and had been living on $17.5K for the previous 40 years.
For the vast, vast, vast majority of households, the $2 million is no more realistic than telling them they should save $2 quadrillion.
$2 million is a marketing slogan targeted at those making more than $100K a year, to scare them into saving more. Realistically, unless your household income is above $100K, and you are able to save 30% or more (or you earn $150K and save 20%), then the $2 million figure is totally unreasonable.
My wife and I earn a combined $160K. Saving 5%, then getting a company match, bringing our total savings up to 10% of income, and adding in our current $100K in savings… over the next 20 years, assuming 2% above inflation rate of return (which we’ve not gotten since 2008) we would be lucky to have half a million dollars.
I won’t even mention how it is mathematically impossible for every entity in an economy to be accumulating money, without an equal amount of new debt being generated… Oops, I just did.
I am sure that Bill in LA will boast returns far in excess of 2% above inflation. I will counter by pointing out that is the DOW had hit 2% above inflation, every year for the last 40 years, it would be at 12,300. Oh, right where it is.
While it is possible for some to beat the average, it is impossible for all, and unlikely that a statistically significant number of people will beat it by a significant amount.
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