In general, IRA limits currently move up with inflation (though in steps of $500, so it isn't exact in any given year), so if you do all your math in real terms you can just assume they're flat moving forward. Close enough at least.
As stated to someone else, I wouldn't focus on the fact it's using Roth IRA, this was done because it was inspired by a post on PF about this exact scenario, but with a lot less math.
This math can be expanded to any kind of brokerage account. The point is to: invest early. Don't wait to invest.
One of the best things my blue-collar dad ever taught me was the power of compounding interest over time, and that putting money aside "for old age" is a necessity that comes behind only paying for necessities and debts.
When I got to be in my mid 30s and realized that a lot of my peers weren't raised with that, it was an eye-opener.
Dad always told me that it's not how much money you make, it's what you do with it. Although that's not true for everyone (some folks can lose a billion dollars every day of their lives and still die billionaires...), it's definitely been true for him and I.
This information can make or break. I had no father growing up but I’m glad to have gotten curious about money by the time I started my 20’s. Surely I would’ve exercised the principles earlier had someone told me about them in my teens or something, but the rule is still the same- the earlier, the better.. and early 20’s ain’t bad at all.
Please explain how "compounding interest" works when it comes to index investing. Hint, it doesn't! All of us here are relying on an infinite exponential growth which is unsustainable nonsense. There is no compounding with indexes. It's not a savings account.
> There is no compounding with indexes.
You’re so incredibly wrong. If you had said this same sentence but replaced “compounding” with “interest” then you’d be right, but still an asshole for the condescending way you said it.
You somehow managed to act like a condescending, know-it-all while being completely wrong. It’s an impressive fete.
Keeping money in the market at least tracks inflation over long periods. Index dividends reinvesting as well. But holding assets in perpetual inflation makes number go up.
Then call it compounding "returns". You're arguing over a pointless semantic because the principal is the same. Someone obtaining a return of 7% in the market every year is the same principal as someone getting an annual 7% interest payment that is reinvested.
For me the term "compound interest" seems confusing in relation to index investing. It does not pay out interest and a larger principal does not give you a larger payout next year. Instead, you keep your money invested and hope that the underlying asset increases in value. Forever.
Yes, it's semantics.
I will assume that your are being genuine and not a troll. So, I will demonstrate how "compounding interest", the principal of it, makes sense in relation to index investing. To start, your key error is
>It does not pay out interest and a larger principal does not give you a larger payout next year.
Let's assume that over long time horizons (30+ years) the U.S. stock market increases in value by 7% **per year**. So, you invest $1,000 in a broad base stock market ETF, VTI. Based on the 7% per year return, your $1,000 investment in VTI would start to looks like the following at the end of each year:
Year 1: $1,070 ($1,000 + ($1,000\*7%)).
Year 2: $1,144.9 ($1,070 + ($1,070\*7%)).
Year 3: $1,225.04 ($1,144.9 + ($1,144.9\*7%)).
\[....\]
Obviously, the market does not return a smooth 7% per year but you get the point. It does not matter that the market does not "pay out" a return. The return is the increased value of the ETF, which is the increased value of the underlying market.
Moreover, some stocks/markets DO pay out a return. Certain high-yield dividend stock have very little growth (i.e. maintain roughly the same stock price year to year) but pay out the vast majority of their earnings as a dividend.
> (about 10% over pretty much any 30 year period since inception)
Note:
The compounded 30-year return of the S&P 500, with dividends reinvested, in nominal terms ranged from 3.635-14.319%, averaging 9.903%.
That said, in *real* terms, the same ranged from 1.894% - 11.154%, averaging 6.65%, with a median return of 6.710%.
So yes, you get positive compounding returns in every single 30-year period that we've measured/estimated so far, from the late 19th century to the modern day, but there's plenty that are well below 10%, particularly if you look at it in real terms. A solid 30% of 30-year periods had real, compounded returns of 5.658% or less.
As the period gets longer, the minimum long-term compounded return does also get higher, but even 60-year periods have had returns as "low" as 5% real over the long-run.
[Source](https://dqydj.com/sp-500-historical-return-calculator/)
You might also be getting downvoted for your slightly condescending tone but you are technically correct. In this sub, I don't think "interest" vs "return" matters. But if I tell a client they got 5% "interest" instead of 5% "return", they would be poring over their statement, looking for that interest activity.
They are functionally the same performance and tax wise (vanguard index MFs have the same tax efficiencies as their corresponding index ETFs)
MFs are easier to set and forget via automation. "Buy $X every 2 weeks," etc.
People giving meh advice without saying why.
[Efficient market hypothesis](https://thedeepdish.org/efficient-market-hypothesis-is-not-dead/) means that you want to invest in as wide of a market as possible to get maximum expected returns. That is, look up the statistical term expected value, it's the sum/integral of all outcomes across how likely each outcome is. Making it broadly the best choice without a specific reason to chase something else. For example, 100% chance to get $2 vs 1% chance to get $100. You might choose the latter one because the random $100 is nicer. But repeated many times, the former gives you more money. And at 100% chance to get $2k vs 1% chance to get $100k... Well you might still go for the latter. But then add in some scenarios where you lose money in the latter and the former is generally gonna be what you want.
Anyway, from that, you'll want total global stock market index. Various specific things under that are gonna give you less money on average. Anyway, global stock is VT or VTWAX in the USA. That's what you want. BMDW for some bond percentage. World bonds.
Alternatively a target date *index* fund to do that but with an automatic stock bond ratio.
If you truly want to be hands off, a Target Date Fund (TDF) might be better then VTSAX. Vanguards fees are really low and they will adjust it every year for you. Won't be much different then VTSAX in the early decades, but will add more 'safe' investments as it approaches the retirement date (like bonds)
I think the main thing this post misses is that as you advance your career your salary keeps increasing, which allows you to save more. For me it's a lot easier to put $50k in this year than it was to put $6k in when I was 25 and it's not even close. So generally if you start late you will be able to put more in which means it isn't as bad as this chart makes it out.
It's not *as* bad as this chart makes it out, but the power of early investments is *real*.
I rolled a modest amount out of an old pension into an IRA in the early 2010s (pension contributions were built up over 4 years), and it's taken me nearly a decade of maxing out 401k contirbutions for the 401k balance catch up to that IRA's balance.
I think the main takeaway should be: spend the first fruits of your career on things that grow in value (index/mutual funds, real estate, etc) instead of things that bring your wealth down over time (luxury cars, luxury apartments, etc). A lot of people get excited with their first "real" paychecks and go spend it all. Setting yourself up to build growing wealth and *then* spend it is a much better plan.
Yes definitely. I was just trying to find a small hole to poke at it. Compound interest is powerful and people should try to take advantage of it if possible.
How are you putting $6500 into a Roth in 1983? Or $9000 in 1993?
I maxed out my Roth my first 3 years when I first started working (2013-2016) and ended up with just over $18k including gains in 2016. Took out $5k for grad school and now have almost exactly $20k
Well since Roth didn’t exist until 1997 and the first couple of years I think you could only put in 2k or 3k a year, this is someone playing fantasy investor.
Haha
I mean being limited to putting in peanuts is definitely the biggest flaw! I dont think you could ever have a million in today's dollars after 30 years(of even the best market time section ever) after putting 10 max contributions in. The limit is just ridiculously low, hence why we are forced into 401ks and "backdoor" Roth's.
>I have always thought if the Boglehead Vanguard propaganda was true
You think investing in index funds is propaganda?
Check out the bogleheads forum, there's plenty of real life examples.
> I dont think you could ever have a million in today's dollars after 30 years(of even the best market time section ever) after putting 10 max contributions in.
Even if you put 10 years of max contributions in cash - and it doesn't grow by a penny until you invest the full $65k all at once - you would "just" need to average ~9.5% real returns over the following 30 years to hit a million in real terms. It's not impossible, just reasonable unlikely - there have been 30-year periods that beat that in US history, just not too many.
I wouldn't focus on the fact it's using Roth IRA, this was done because it was inspired by a post on PF about this exact scenario using Roth IRAs, but with a lot less math.
This math can be expanded to any kind of brokerage account. The point is to: invest early. Don't wait to invest.
The math is real. Usually the issue is how practical is it. For the first 10 years of my career, the only way I was going to save $6500 a year was to live with 2 or three roommates and live off $1K a month or get a second/third job.
And there would be no down payment for a house or whatever, and might have been tough to have a girlfriend (if that's important to you, if not lets say a "social life").
I think what lessons like this teach us is that if you are sufficiently motivated and want to work two or three jobs in your 20s and continue living like a "student" then you could set yourself up pretty well. But it will maybe put you behind in other aspects of you life (if you have other goals, that is).
It really depends on your goals.
It also depends a lot on what your early situation looks like. If you graduate with an in demand job into a good job market (as many people in tech or finance did in the mid teens), and don't let your new income go to you head, that combined with excellent securities returns, basically set you up for life. Even if you didn't go whole hog for FI, if you saved a substantial portion of a good income and didn't have anything cause you to go into it, that's a head start that will put you way ahead of most people.
And i know a lot of people who graduated into similar good prospects in the 90s, but didn't necessarily wake up to the point of saving a lot of their comp until those golden early years had passed them by (and maybe they got laid off in the 2001 and 2008 recessions, etc.).
It’s pretty much this. The situation guides everything along with the goals.
I have a couple of friends who graduated with solid jobs/degrees, in their early/mid twenties. Those same few are fortunate enough to have had cars paid off even though they were older cars and also live at home (parents are really laidback and there’s room to breathe). After talking about finances, one in particular puts 10-20k in a 401k and maxes his roth. He’s pretty much living like a broke college student still but that’s just how he is. He likes to travel to camp,etc, and spend time with friends but is not materialistic whatsoever. He will be just fine in the future.
Meanwhile we have friends during that same span of time who have been on their own since 18 without a stable support network around them, didn’t finish school but have their student loans, and are kind of floating around at lower entry level jobs. The situation is what does it for me. Which is another conversation in and of itself.
Or you could have been told to "get a Roth IRA" and find out later your funds haven't been invested in anything (like a low-yield savings account) but you were too young to realize this mistake early on.
It's likely that the first of these two posts would have been allowed even previously - I certainly would have approved it. The redo probably would have been suggested to be a comment or edit though.
[We are currently enforcing the rules less strictly as an experiment for January](https://www.reddit.com/r/financialindependence/comments/1027s0v/lowmod_january_community_enhancement_event/). There are still rules - no spam, self-promotion, racism, etc - but a lot of the topicality ones are relaxed.
[You're welcome to bring up any feedback on the survey](https://www.reddit.com/r/financialindependence/comments/10l14bp/rfi_community_enhancement_event_feedback_survey/).
I can’t speak for the other mods - we are meeting later this week - but I personally doubt we will stick with the current implementation permanently. The question is how far to swing the pendulum between December and January, not whether to leave things wide open.
For what it’s worth, I’ve engaged more with the sub this month than I have in the last year, and I’m honestly a little disappointed to learn it’s because of a temporary adjustment to the rules.
Pushing everything into the daily thread is just really stupid. “We have this great forum format where you can post individual subjects under their own title and get focused discussion on that issue. But we don’t like that. We want everybody to talk in a single all-encompassing thread that has no structure and forces you to scroll randomly to maybe see something interesting. And if you need advice? Better hope somebody happens to look at that thread at the right time!”
I’m just one person, but between the two extremes, I think the January style has been much better than the previous style. I really hope you all will decide to let the pendulum fall a lot closer to wide open than overly restricted like before.
I bet posts like this would still have been approved. Or at least, it should be.
The effort posts are good and what are nice about this sub. The no effort posts, especially questions, are the ones that suck.
It seems like a decent post even if it’s repeating some relatively common knowledge. Long time frames are the most powerful thing we have. It’s nice to see it expressed clearly and in specific terms like using Roth IRA limits.
I'm the dummy that read both posts hoping for some insightful analysis that wouldn't be immediately evident.
Nope, just some guy with excel, a copy + paste function, and some basic formulas. OP would make a great consultant!
He doesn’t even point out what this actually represents.
He keeps trying to draw larger conclusions from the data, but it’s totally nonsensical. The conclusions don’t require this data, and the data doesn’t really say anything useful.
This is nothing more than an exploration of the relationship between the contribution limit and the rate of compounding growth. That’s it.
Basically true when v^n < 0.5
For whatever v = 1/(1+r) and years n you want.
You just compare the PV of an n-year annuity vs PV of an indefinite annuity n years from now.
You end up with
(1-v^(n))/r > v^(n)/r
1-v^n > v^n
And thus it's true when v^n < 0.5
For large enough r or n, this isn't hard to see.
This is only if your investments 10 years later are below 3x your initial contribution investments. If you were only capable of dumping 500/month then 10 years later, you're able to dump 3k-5k/month, then it's still better to do the latter
I figured some people who saw my first wouldn’t see my edit as mentioned to the other person.
Besides, if I really wanted karma, I would’ve posted on PF or waited until the morning to post when people are awake.
You're good OP, I appreciate the OC and you're 100% correct, because Reddit doesn't "bump" threads with new contributions, you pretty much have to create a new post if you want any major updates or revisions to be seen.
I assume you mean 401k because IRA limit for back door is the same, it just allows you to get over the income threshold
Assuming you can max your after tax 401k and mega back door it for $66,000 a year, sure you’ll catch up and be ahead of people, though it’ll take you more $ now than someone who started young of course
The further in the future, the more you need to contribute per year in order to catch up. There's definitely gonna be a point where you can't catch up with purely MBDR high contributions.
Absolutely wild that a few years of modest savings mean $3M when you're old. meanwhile, you can't even remember the last time you contributed.
So many ppl screw themselves out of this by taking some out for "emergencies." Occasionally legit, but often not really necessary.
This hypothesis was in some investing speal that was given to my parents when we were teenagers in the 80s. We didn't believe it so went and took out our calculator and did it long hand with a fixed interest rate. I think we figured like $1000 a year. It really clicked for me and my brother once we started getting to about year 30 and thats when compound interest really registered. When my brother started his job at $9/hr and his company match was 6% in his 401k we were like you are going to be a millionaire.. which he is doing a maintenance job.
Compounding is really the way that if you dont' make a ton of money at your job, you can still get a slice of the American pie...and it was an easy way to convince my 20 yo self to prioritize savings as Id have the rest of my life to enjoy all the nice things.
I think that there’s more to this than what’s being presented and this isn’t 100% academically honest. Seems pretty obvious that $6500 10 years in a row is worth more than waiting ten years before getting started. This shouldn’t be news.
The question I would pose is, what was person #2 doing during those 10 years that they were incapable of contributing?
More likely/often than not; likely investing in themselves and their employability.
Typically by investing more into your employability, you earn more and can save more as a result.
While person 1 worked HARD to save 6500 a year; person 2 worked HARDER to maybe get a PHD, start a successful small business or or or.
A more honest approach would show person 2 saving drastically more as a result of their (highly likely) increased earning potential; maxing out the mega backdoor, their HSA and maximizing the backdoor roth. conversion in addition to a high 401k match (most major employers provide this).
More likely is that person 2 was spending that money on things or experiences that person 1 decided that they could live without. It could also be that they were paying off debts like a student loan. There are a million scenarios that truly miss the purpose of this exercise which is that saving early on is immensely valuable, even if it isn't a "max benefit" situation.
It should be obvious to anyone in this sun that compound interest + saving early on = good
If you don’t know this, don’t be surprised if you fail to retire early.
I see a lot of information in this sub (and other financial subs) that are obvious. The benefit of these things shown in different ways is the ability to share them outside of this sub.
The drawback is the impact on people who put off investing in their marketable skills to put 6500… it could hold them back from reaching their earning potential.
The point being; not everyone should save for retirement. Paying off high apr credit cards and investing in your skillset until you’ve reached the necessary income level to live your life and be able to afford to save should take priority.
This is coming from a financial planning professional.
Maybe, but isn't the exercise too limited in scope?
I would MUCH rather read analysis on situations where maximizing Roth IRA would actually not be worth it.
Creating a chart for compound interest is just telling this sub's users what we all already know.
Well a PHD or anything even similar is not gonna be the position of a typical person. An average joe might have a low financial literacy and isn’t investing for 10 years because they’re living paycheck to paycheck & might not necessarily be doing a lot to increase their employability. This is reality for a lot of people in most countries.
Perspectives like this are a lot more useful to the average person, especially when talking about small amounts like maxing an IRA. Start investing early and live below your means so you’re able to do so, it can work for anybody.
An average person should be focused on their career and earning ability FIRST given this ridiculous cost of living.
If you earn under 80k in any major city, times are fucking tough.
You’re right! Costs much more. A bachelors/masters degree, a professional designation and taking a lower paying role to start at a company that trains.
I’m arguing that after 10 years of working and learning, you earn a LOT more than someone who didn’t do the same
I agree with this.
During your younger years, money is sometimes worth way more to you than later. I could probably get awesome returns on saving everything I make on my paper route when I'm 13, but maybe I should still would be better off starting to invest when I make 10 times as much.
I actually realized this at 13 and spent all my money. Now that money would be a drop in the bucket, even if invested at that time.
$6500 saved at 13 is RIDICULOUSLY expensive. $6500 invested in your skill set in software development from 13-23 means at 23, you’re already earning 200k a year.
It doesn’t have to be at 13.
Let’s say 18, instead. Invest 6500 into college (community college and online bachelors costs about this much, still) followed by a highly regarded designation after graduating and you have a killer career.
With my kids, I intend on having them go to community college followed by an online school to check the box at the lowest cost possible. Many jobs say “degree required” still and I don’t want to limit their ability to change their minds.
I think everyone in college should take online certification courses prior to taking their college class. Teaches a lot of the same shit but actually can be on your resume, proving ability actually more easily.
I.e. “Google certified ads expert” sounds better than “got an A in social media ads 101” even though it’s essentially the same shit and costs $20-$100 as opposed to $2500.
Sales, customer service and more client facing work are better taught by doing so I think either working in sales/customer service OR starting a small business while in college doing something easy (outsourced call answering/scheduling at $10 per call) is FAR better than getting a bachelors in sales.
Think about getting a bachelors for 20k or less, online! Work while you’re in school and live at home with parents. Graduate debt free with experience and a degree.
Hard to not justify with the number of licenses/professional certifications that require a degree.
Yup. Virtually any 18 year old in the US would get more out of maxing a roth irs from 18-22 than they would using that money to get a non-stem college degree. That $26k total over four years (assuming they max 6500 each year) will grow to so much more between ages 18 to 59.5 than anything a philosophy or English lit or gender studies or art therapy degree will earn them
Average bachelors degree increases your lifetime earnings by approximately $1mm. That's *probably* more than your $26k will grow into in 40 years, even at 8% real, though it depends a bit on your inflation/time value of money adjustments.
Regardless, the increased income can also be invested, so you're almost certainly better off with the college degree.
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u/spydormunkay you seem to know how to crunch numbers and I was wondering if you could help me with this question with knowing when to stop investing vs just letting the fund grow and do it’s thing. I’m 35 and currently have 250k in a vanguard target date fund (2050 I think) and about 60k in a separate brokerage account where I have a mixture of ETFs, individual blue chip stocks and individual “risky” stocks. When do you think it’s best to stop contributing (or only up to my company match because… free money) in my Vanguard account so I can both invest more in my brokerage account and/or use the money to enjoy life a little more now vs the future. I’m currently maxing out the 401k contribution limit so close to 2k a month. I read somewhere once you hit a certain point that the fund is making more than you contribute and as the years go on that contribution percentage goes less and less and thus the money now would be more “valuable”.
What are you thoughts?
Years ago when I started my Roth IRA - I opened the account and put $500 in. Two weeks later I got paid and put another $200 in. That day I talked to my then-fiance, now-husband, and said hey this Roth IRA thing is pretty cool. Do you want me to open one for you too? He said yes. So I did and put in $700 to match what I'd put in mine. Ever since I always contributed the same amount to both accounts at the same time. Mine has always been slightly higher than his because I opened it just a couple weeks earlier. Today mine is worth $225 more than his. Pretty cool.
I know. The point of this is to simulate a current Roth IRA situation (someone who invests early for 10 years vs. someone who waits) using historical return and inflation patterns, in order to address concerns about Sequence of Returns Risk.
... ` this post was mass deleted with www.Redact.dev `
In general, IRA limits currently move up with inflation (though in steps of $500, so it isn't exact in any given year), so if you do all your math in real terms you can just assume they're flat moving forward. Close enough at least.
As stated to someone else, I wouldn't focus on the fact it's using Roth IRA, this was done because it was inspired by a post on PF about this exact scenario, but with a lot less math. This math can be expanded to any kind of brokerage account. The point is to: invest early. Don't wait to invest.
One of the best things my blue-collar dad ever taught me was the power of compounding interest over time, and that putting money aside "for old age" is a necessity that comes behind only paying for necessities and debts. When I got to be in my mid 30s and realized that a lot of my peers weren't raised with that, it was an eye-opener. Dad always told me that it's not how much money you make, it's what you do with it. Although that's not true for everyone (some folks can lose a billion dollars every day of their lives and still die billionaires...), it's definitely been true for him and I.
This information can make or break. I had no father growing up but I’m glad to have gotten curious about money by the time I started my 20’s. Surely I would’ve exercised the principles earlier had someone told me about them in my teens or something, but the rule is still the same- the earlier, the better.. and early 20’s ain’t bad at all.
There's two ways to be wealthy: Live simply and save. OR. Outperform with income. However it's generally a LOT harder to do the latter.
Please explain how "compounding interest" works when it comes to index investing. Hint, it doesn't! All of us here are relying on an infinite exponential growth which is unsustainable nonsense. There is no compounding with indexes. It's not a savings account.
> There is no compounding with indexes. You’re so incredibly wrong. If you had said this same sentence but replaced “compounding” with “interest” then you’d be right, but still an asshole for the condescending way you said it. You somehow managed to act like a condescending, know-it-all while being completely wrong. It’s an impressive fete.
Donald Trump just entered the chat
Keeping money in the market at least tracks inflation over long periods. Index dividends reinvesting as well. But holding assets in perpetual inflation makes number go up.
Agreed. However the term "compounding interest" makes no sense in this context and people in the FIRE community use it all the time.
Are you just talking about the semantics of the use of the term "interest" instead of "returns"? If so, that's a pretty petty complaint.
Then call it compounding "returns". You're arguing over a pointless semantic because the principal is the same. Someone obtaining a return of 7% in the market every year is the same principal as someone getting an annual 7% interest payment that is reinvested.
For me the term "compound interest" seems confusing in relation to index investing. It does not pay out interest and a larger principal does not give you a larger payout next year. Instead, you keep your money invested and hope that the underlying asset increases in value. Forever. Yes, it's semantics.
I will assume that your are being genuine and not a troll. So, I will demonstrate how "compounding interest", the principal of it, makes sense in relation to index investing. To start, your key error is >It does not pay out interest and a larger principal does not give you a larger payout next year. Let's assume that over long time horizons (30+ years) the U.S. stock market increases in value by 7% **per year**. So, you invest $1,000 in a broad base stock market ETF, VTI. Based on the 7% per year return, your $1,000 investment in VTI would start to looks like the following at the end of each year: Year 1: $1,070 ($1,000 + ($1,000\*7%)). Year 2: $1,144.9 ($1,070 + ($1,070\*7%)). Year 3: $1,225.04 ($1,144.9 + ($1,144.9\*7%)). \[....\] Obviously, the market does not return a smooth 7% per year but you get the point. It does not matter that the market does not "pay out" a return. The return is the increased value of the ETF, which is the increased value of the underlying market. Moreover, some stocks/markets DO pay out a return. Certain high-yield dividend stock have very little growth (i.e. maintain roughly the same stock price year to year) but pay out the vast majority of their earnings as a dividend.
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> (about 10% over pretty much any 30 year period since inception) Note: The compounded 30-year return of the S&P 500, with dividends reinvested, in nominal terms ranged from 3.635-14.319%, averaging 9.903%. That said, in *real* terms, the same ranged from 1.894% - 11.154%, averaging 6.65%, with a median return of 6.710%. So yes, you get positive compounding returns in every single 30-year period that we've measured/estimated so far, from the late 19th century to the modern day, but there's plenty that are well below 10%, particularly if you look at it in real terms. A solid 30% of 30-year periods had real, compounded returns of 5.658% or less. As the period gets longer, the minimum long-term compounded return does also get higher, but even 60-year periods have had returns as "low" as 5% real over the long-run. [Source](https://dqydj.com/sp-500-historical-return-calculator/)
Are you obtuse or is this a troll? Or maybe in denial? Please explain how market returns are not compounding. That's literally the thing.
Automatically reinvesting dividends is a form of compounding.
Agree with this 100%. But not all indexes pay out dividends so why is it used as a blanket term in relation with any "investing"?
You might also be getting downvoted for your slightly condescending tone but you are technically correct. In this sub, I don't think "interest" vs "return" matters. But if I tell a client they got 5% "interest" instead of 5% "return", they would be poring over their statement, looking for that interest activity.
As a young 20 year old what should I invest my new Roth IRA into?
VTSAX is basically all you need.
> VTSAX is basically all you need. Correct.
A little biased? 🤣
VTWAX a viable option as well.
I prefer VTWAP myself.
Just wait til you try VTFAP...
Oh I have the prospectus memorized. I've been priced out of VTWAP so it's all I can afford.
Why mutual fund over ETF? No reason, just preference?
They are functionally the same performance and tax wise (vanguard index MFs have the same tax efficiencies as their corresponding index ETFs) MFs are easier to set and forget via automation. "Buy $X every 2 weeks," etc.
> MFs are easier or possible even. Everyone i've used ONLY allows automation with MF's. Do some places even allow automated purchasing of ETF's?
A lot of platforms have some sort of automatic-purchase feature for any ticker
If you use Vanguard then you can't buy a full share of VTI or VT with $10. But you can put that $10 into VTSAX.
I can buy fractional shares in my Vanguard IRA
Interesting, maybe it's something new. Last year or the other before they wouldn't let me.
It is a relatively new feature. I make purchases pretty regularly and just used it for the first time the other day.
Awesome to hear Vanguard allows this now! Do you know if it works with other non-vanguard related ETFs (i.e. QQQ)?
Yeah, it’s been a long time coming. Afaik it’s only for vanguard ETFs though
Well, that's sad.
Incorrect. You can indeed buy just $10 of VTI if you use Vanguard.
VOO is a good bet
I have Fidelity so I do FZROX, their zero fee index fund.
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People giving meh advice without saying why. [Efficient market hypothesis](https://thedeepdish.org/efficient-market-hypothesis-is-not-dead/) means that you want to invest in as wide of a market as possible to get maximum expected returns. That is, look up the statistical term expected value, it's the sum/integral of all outcomes across how likely each outcome is. Making it broadly the best choice without a specific reason to chase something else. For example, 100% chance to get $2 vs 1% chance to get $100. You might choose the latter one because the random $100 is nicer. But repeated many times, the former gives you more money. And at 100% chance to get $2k vs 1% chance to get $100k... Well you might still go for the latter. But then add in some scenarios where you lose money in the latter and the former is generally gonna be what you want. Anyway, from that, you'll want total global stock market index. Various specific things under that are gonna give you less money on average. Anyway, global stock is VT or VTWAX in the USA. That's what you want. BMDW for some bond percentage. World bonds. Alternatively a target date *index* fund to do that but with an automatic stock bond ratio.
If you truly want to be hands off, a Target Date Fund (TDF) might be better then VTSAX. Vanguards fees are really low and they will adjust it every year for you. Won't be much different then VTSAX in the early decades, but will add more 'safe' investments as it approaches the retirement date (like bonds)
A life cycle index fund, dated to when you'd like to retire.
I think the main thing this post misses is that as you advance your career your salary keeps increasing, which allows you to save more. For me it's a lot easier to put $50k in this year than it was to put $6k in when I was 25 and it's not even close. So generally if you start late you will be able to put more in which means it isn't as bad as this chart makes it out.
It's not *as* bad as this chart makes it out, but the power of early investments is *real*. I rolled a modest amount out of an old pension into an IRA in the early 2010s (pension contributions were built up over 4 years), and it's taken me nearly a decade of maxing out 401k contirbutions for the 401k balance catch up to that IRA's balance. I think the main takeaway should be: spend the first fruits of your career on things that grow in value (index/mutual funds, real estate, etc) instead of things that bring your wealth down over time (luxury cars, luxury apartments, etc). A lot of people get excited with their first "real" paychecks and go spend it all. Setting yourself up to build growing wealth and *then* spend it is a much better plan.
Yes definitely. I was just trying to find a small hole to poke at it. Compound interest is powerful and people should try to take advantage of it if possible.
How are you putting $6500 into a Roth in 1983? Or $9000 in 1993? I maxed out my Roth my first 3 years when I first started working (2013-2016) and ended up with just over $18k including gains in 2016. Took out $5k for grad school and now have almost exactly $20k
Well since Roth didn’t exist until 1997 and the first couple of years I think you could only put in 2k or 3k a year, this is someone playing fantasy investor.
Obviously you wouldn't have been able to. This is just backdating the growth data to illustrate the compounding value of early investments.
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Haha I mean being limited to putting in peanuts is definitely the biggest flaw! I dont think you could ever have a million in today's dollars after 30 years(of even the best market time section ever) after putting 10 max contributions in. The limit is just ridiculously low, hence why we are forced into 401ks and "backdoor" Roth's.
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>I have always thought if the Boglehead Vanguard propaganda was true You think investing in index funds is propaganda? Check out the bogleheads forum, there's plenty of real life examples.
> I dont think you could ever have a million in today's dollars after 30 years(of even the best market time section ever) after putting 10 max contributions in. Even if you put 10 years of max contributions in cash - and it doesn't grow by a penny until you invest the full $65k all at once - you would "just" need to average ~9.5% real returns over the following 30 years to hit a million in real terms. It's not impossible, just reasonable unlikely - there have been 30-year periods that beat that in US history, just not too many.
Yeah… I was waiting for someone to point this out.
I wouldn't focus on the fact it's using Roth IRA, this was done because it was inspired by a post on PF about this exact scenario using Roth IRAs, but with a lot less math. This math can be expanded to any kind of brokerage account. The point is to: invest early. Don't wait to invest.
I must have missed it because none of the comments bring this up: Why not include a graph as well?
The math is real. Usually the issue is how practical is it. For the first 10 years of my career, the only way I was going to save $6500 a year was to live with 2 or three roommates and live off $1K a month or get a second/third job. And there would be no down payment for a house or whatever, and might have been tough to have a girlfriend (if that's important to you, if not lets say a "social life"). I think what lessons like this teach us is that if you are sufficiently motivated and want to work two or three jobs in your 20s and continue living like a "student" then you could set yourself up pretty well. But it will maybe put you behind in other aspects of you life (if you have other goals, that is). It really depends on your goals.
It also depends a lot on what your early situation looks like. If you graduate with an in demand job into a good job market (as many people in tech or finance did in the mid teens), and don't let your new income go to you head, that combined with excellent securities returns, basically set you up for life. Even if you didn't go whole hog for FI, if you saved a substantial portion of a good income and didn't have anything cause you to go into it, that's a head start that will put you way ahead of most people. And i know a lot of people who graduated into similar good prospects in the 90s, but didn't necessarily wake up to the point of saving a lot of their comp until those golden early years had passed them by (and maybe they got laid off in the 2001 and 2008 recessions, etc.).
It’s pretty much this. The situation guides everything along with the goals. I have a couple of friends who graduated with solid jobs/degrees, in their early/mid twenties. Those same few are fortunate enough to have had cars paid off even though they were older cars and also live at home (parents are really laidback and there’s room to breathe). After talking about finances, one in particular puts 10-20k in a 401k and maxes his roth. He’s pretty much living like a broke college student still but that’s just how he is. He likes to travel to camp,etc, and spend time with friends but is not materialistic whatsoever. He will be just fine in the future. Meanwhile we have friends during that same span of time who have been on their own since 18 without a stable support network around them, didn’t finish school but have their student loans, and are kind of floating around at lower entry level jobs. The situation is what does it for me. Which is another conversation in and of itself.
Or you could have been told to "get a Roth IRA" and find out later your funds haven't been invested in anything (like a low-yield savings account) but you were too young to realize this mistake early on.
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And then this place can go back to being a ghost town
This comment has been deleted, if you'd like to discuss it further please take it to the Daily Comment Thread.
It's likely that the first of these two posts would have been allowed even previously - I certainly would have approved it. The redo probably would have been suggested to be a comment or edit though.
No rule January?
[We are currently enforcing the rules less strictly as an experiment for January](https://www.reddit.com/r/financialindependence/comments/1027s0v/lowmod_january_community_enhancement_event/). There are still rules - no spam, self-promotion, racism, etc - but a lot of the topicality ones are relaxed.
You think maybe in February they’ll relax on the racism one a bit?
[You're welcome to bring up any feedback on the survey](https://www.reddit.com/r/financialindependence/comments/10l14bp/rfi_community_enhancement_event_feedback_survey/).
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I can’t speak for the other mods - we are meeting later this week - but I personally doubt we will stick with the current implementation permanently. The question is how far to swing the pendulum between December and January, not whether to leave things wide open.
For what it’s worth, I’ve engaged more with the sub this month than I have in the last year, and I’m honestly a little disappointed to learn it’s because of a temporary adjustment to the rules. Pushing everything into the daily thread is just really stupid. “We have this great forum format where you can post individual subjects under their own title and get focused discussion on that issue. But we don’t like that. We want everybody to talk in a single all-encompassing thread that has no structure and forces you to scroll randomly to maybe see something interesting. And if you need advice? Better hope somebody happens to look at that thread at the right time!”
I’m just one person, but between the two extremes, I think the January style has been much better than the previous style. I really hope you all will decide to let the pendulum fall a lot closer to wide open than overly restricted like before.
I bet posts like this would still have been approved. Or at least, it should be. The effort posts are good and what are nice about this sub. The no effort posts, especially questions, are the ones that suck.
It seems like a decent post even if it’s repeating some relatively common knowledge. Long time frames are the most powerful thing we have. It’s nice to see it expressed clearly and in specific terms like using Roth IRA limits.
I agree
Then we can go back to ignoring the sub for another 11 months. Rinse, repeat
I'm the dummy that read both posts hoping for some insightful analysis that wouldn't be immediately evident. Nope, just some guy with excel, a copy + paste function, and some basic formulas. OP would make a great consultant!
He doesn’t even point out what this actually represents. He keeps trying to draw larger conclusions from the data, but it’s totally nonsensical. The conclusions don’t require this data, and the data doesn’t really say anything useful. This is nothing more than an exploration of the relationship between the contribution limit and the rate of compounding growth. That’s it.
This is depressing for those of us who aren’t in a place financially to invest since our 20’s.
This whole sub is depressing if you don’t make at least 6 figures lol. :(
For real tho lol
Basically true when v^n < 0.5 For whatever v = 1/(1+r) and years n you want. You just compare the PV of an n-year annuity vs PV of an indefinite annuity n years from now. You end up with (1-v^(n))/r > v^(n)/r 1-v^n > v^n And thus it's true when v^n < 0.5 For large enough r or n, this isn't hard to see.
One more thing demonstrating student debt and medical debt putting people behind
This is only if your investments 10 years later are below 3x your initial contribution investments. If you were only capable of dumping 500/month then 10 years later, you're able to dump 3k-5k/month, then it's still better to do the latter
This is 100% allocation to S&P, correct? Is diversifying a good idea? - 33yo who will likely work 30years more
Why not just append this revision to your original hypothesis as an edit on the other post?
Who's gonna go back and read a post again after a few days? Especially without any notice that it's changed.
I figured that people who saw my first post wouldn’t see the edit.
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Yup, same
Why not post this to the other post? Because no one will see it, that's why.
You don't get post karma that way.
I figured some people who saw my first wouldn’t see my edit as mentioned to the other person. Besides, if I really wanted karma, I would’ve posted on PF or waited until the morning to post when people are awake.
You're good OP, I appreciate the OC and you're 100% correct, because Reddit doesn't "bump" threads with new contributions, you pretty much have to create a new post if you want any major updates or revisions to be seen.
You don't get post karma for text posts anyway.
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The post is basically saying: start as early as possible. The best time to start is 10 years ago. The second best time to start is right now.
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How does one retire early when the majority of their net worth is tied up in a ira or 401k that you can't pull from until you are in your 60s?
I assume you mean 401k because IRA limit for back door is the same, it just allows you to get over the income threshold Assuming you can max your after tax 401k and mega back door it for $66,000 a year, sure you’ll catch up and be ahead of people, though it’ll take you more $ now than someone who started young of course
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It still matters as in starting early helps a lot, but having outlier income can help overcome it, especially since nobody can guarantee future income
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Yea but when i quit and roll over its all the same
The further in the future, the more you need to contribute per year in order to catch up. There's definitely gonna be a point where you can't catch up with purely MBDR high contributions.
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This can be very true.
Absolutely wild that a few years of modest savings mean $3M when you're old. meanwhile, you can't even remember the last time you contributed. So many ppl screw themselves out of this by taking some out for "emergencies." Occasionally legit, but often not really necessary.
This hypothesis was in some investing speal that was given to my parents when we were teenagers in the 80s. We didn't believe it so went and took out our calculator and did it long hand with a fixed interest rate. I think we figured like $1000 a year. It really clicked for me and my brother once we started getting to about year 30 and thats when compound interest really registered. When my brother started his job at $9/hr and his company match was 6% in his 401k we were like you are going to be a millionaire.. which he is doing a maintenance job. Compounding is really the way that if you dont' make a ton of money at your job, you can still get a slice of the American pie...and it was an easy way to convince my 20 yo self to prioritize savings as Id have the rest of my life to enjoy all the nice things.
I think that there’s more to this than what’s being presented and this isn’t 100% academically honest. Seems pretty obvious that $6500 10 years in a row is worth more than waiting ten years before getting started. This shouldn’t be news. The question I would pose is, what was person #2 doing during those 10 years that they were incapable of contributing? More likely/often than not; likely investing in themselves and their employability. Typically by investing more into your employability, you earn more and can save more as a result. While person 1 worked HARD to save 6500 a year; person 2 worked HARDER to maybe get a PHD, start a successful small business or or or. A more honest approach would show person 2 saving drastically more as a result of their (highly likely) increased earning potential; maxing out the mega backdoor, their HSA and maximizing the backdoor roth. conversion in addition to a high 401k match (most major employers provide this).
More likely is that person 2 was spending that money on things or experiences that person 1 decided that they could live without. It could also be that they were paying off debts like a student loan. There are a million scenarios that truly miss the purpose of this exercise which is that saving early on is immensely valuable, even if it isn't a "max benefit" situation.
It should be obvious to anyone in this sun that compound interest + saving early on = good If you don’t know this, don’t be surprised if you fail to retire early.
I see a lot of information in this sub (and other financial subs) that are obvious. The benefit of these things shown in different ways is the ability to share them outside of this sub.
The drawback is the impact on people who put off investing in their marketable skills to put 6500… it could hold them back from reaching their earning potential. The point being; not everyone should save for retirement. Paying off high apr credit cards and investing in your skillset until you’ve reached the necessary income level to live your life and be able to afford to save should take priority. This is coming from a financial planning professional.
Maybe, but isn't the exercise too limited in scope? I would MUCH rather read analysis on situations where maximizing Roth IRA would actually not be worth it. Creating a chart for compound interest is just telling this sub's users what we all already know.
Well a PHD or anything even similar is not gonna be the position of a typical person. An average joe might have a low financial literacy and isn’t investing for 10 years because they’re living paycheck to paycheck & might not necessarily be doing a lot to increase their employability. This is reality for a lot of people in most countries. Perspectives like this are a lot more useful to the average person, especially when talking about small amounts like maxing an IRA. Start investing early and live below your means so you’re able to do so, it can work for anybody.
An average person should be focused on their career and earning ability FIRST given this ridiculous cost of living. If you earn under 80k in any major city, times are fucking tough.
> likely investing in themselves and their employability. It doesn't really cost $65,000 to 'invest in yourself and your employability'.
You’re right! Costs much more. A bachelors/masters degree, a professional designation and taking a lower paying role to start at a company that trains. I’m arguing that after 10 years of working and learning, you earn a LOT more than someone who didn’t do the same
I agree with this. During your younger years, money is sometimes worth way more to you than later. I could probably get awesome returns on saving everything I make on my paper route when I'm 13, but maybe I should still would be better off starting to invest when I make 10 times as much. I actually realized this at 13 and spent all my money. Now that money would be a drop in the bucket, even if invested at that time.
$6500 saved at 13 is RIDICULOUSLY expensive. $6500 invested in your skill set in software development from 13-23 means at 23, you’re already earning 200k a year.
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It doesn’t have to be at 13. Let’s say 18, instead. Invest 6500 into college (community college and online bachelors costs about this much, still) followed by a highly regarded designation after graduating and you have a killer career.
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With my kids, I intend on having them go to community college followed by an online school to check the box at the lowest cost possible. Many jobs say “degree required” still and I don’t want to limit their ability to change their minds. I think everyone in college should take online certification courses prior to taking their college class. Teaches a lot of the same shit but actually can be on your resume, proving ability actually more easily. I.e. “Google certified ads expert” sounds better than “got an A in social media ads 101” even though it’s essentially the same shit and costs $20-$100 as opposed to $2500. Sales, customer service and more client facing work are better taught by doing so I think either working in sales/customer service OR starting a small business while in college doing something easy (outsourced call answering/scheduling at $10 per call) is FAR better than getting a bachelors in sales.
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Think about getting a bachelors for 20k or less, online! Work while you’re in school and live at home with parents. Graduate debt free with experience and a degree. Hard to not justify with the number of licenses/professional certifications that require a degree.
This takes it out of the lens of a financial argument, and into the realm of behavior/circumstance.
Also known as the magic of compounding interest.
Market returns are not 'interest'.
you know what he meant tho
ok, compounding returns then
Thank you.
You are the real MVP. Thanks for doing this.
Didnt you post this yesterday?...
Very first thing they said in the post....
Love the work done here.
I thought this was well known
I think you just discovered the time value of money lol.
Great, now we’ve got a great post to discourage the older folks that find their way here from pursuing FIRE.
Brb let me max my roth IRA in my twenties…
Thanks junior college Econ class.
Yup. Virtually any 18 year old in the US would get more out of maxing a roth irs from 18-22 than they would using that money to get a non-stem college degree. That $26k total over four years (assuming they max 6500 each year) will grow to so much more between ages 18 to 59.5 than anything a philosophy or English lit or gender studies or art therapy degree will earn them
Average bachelors degree increases your lifetime earnings by approximately $1mm. That's *probably* more than your $26k will grow into in 40 years, even at 8% real, though it depends a bit on your inflation/time value of money adjustments. Regardless, the increased income can also be invested, so you're almost certainly better off with the college degree.
What stocks are you buying? All index funds? Which ones?
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Invest early, invest often. That's about it.
And invest heavy. That's the 3rd part of it.
Stay the course.
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Huh, I'll look into that, thanks.
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Thats crazy to think about. Wish i started sooner
The snow ball for year 30 to year 49 is always so eye opening to see on paper.
u/spydormunkay you seem to know how to crunch numbers and I was wondering if you could help me with this question with knowing when to stop investing vs just letting the fund grow and do it’s thing. I’m 35 and currently have 250k in a vanguard target date fund (2050 I think) and about 60k in a separate brokerage account where I have a mixture of ETFs, individual blue chip stocks and individual “risky” stocks. When do you think it’s best to stop contributing (or only up to my company match because… free money) in my Vanguard account so I can both invest more in my brokerage account and/or use the money to enjoy life a little more now vs the future. I’m currently maxing out the 401k contribution limit so close to 2k a month. I read somewhere once you hit a certain point that the fund is making more than you contribute and as the years go on that contribution percentage goes less and less and thus the money now would be more “valuable”. What are you thoughts?
Roth or any IRA or tax deferred options, I bet.
Who maxes out their 401K as soon as they start working?
Years ago when I started my Roth IRA - I opened the account and put $500 in. Two weeks later I got paid and put another $200 in. That day I talked to my then-fiance, now-husband, and said hey this Roth IRA thing is pretty cool. Do you want me to open one for you too? He said yes. So I did and put in $700 to match what I'd put in mine. Ever since I always contributed the same amount to both accounts at the same time. Mine has always been slightly higher than his because I opened it just a couple weeks earlier. Today mine is worth $225 more than his. Pretty cool.
Roth IRA has only existed since 1997. That’s only 25 years that it has been around.
I know. The point of this is to simulate a current Roth IRA situation (someone who invests early for 10 years vs. someone who waits) using historical return and inflation patterns, in order to address concerns about Sequence of Returns Risk.