Personally, I’ve always looked askance at brochures and statements from financial institutions that purport to show you how much money you can retire on if you only saved a few dollars each month now.
Because these calculations inevitably make many unrealistic assumptions in order to arrive at that magical retirement figure. A common one is to project a positive, double-digit annual return rate on your portfolio each year, which is unlikely to happen each year over many years.
Case in point: I just received my quarterly statement from Vanguard today for my company’s 401(K) savings plan.
At the bottom of the first page of the statement (click on image above to see the full statement), it says:
In retirement, we estimate you’ll be able to withdraw about $2,505 a month from your employer’s retirement plan at Vanguard. This estimate is based on your average monthly contributions of $553 at Vanguard over the previous 12 months.
It then goes on to show how much more I could be taking out at retirement by increasing my current contributions to my 401(K) plan now.
The funny thing is that I have no idea how they arrived at the $2,505 figure. And is it in terms of current 2007 dollars, or future 2041 dollars, when I’ll retire? I mean, this statement should really make you scratch your head and wonder what assumptions they made to make your money magically multiply.