Retirement is probably closer than you think

08 Mar 2016

A pretty common theme whenever Mr. Money Mustache does a "case study" is that, with a little bit of tweaking, people who think otherwise are on track or are already capable of retiring.

I was recently looking at my retirement progress, and was discouraged by what I saw. I'm only 20% of the way toward my goal, but 30% of the way through my career according to my last calculation on Ploutus. That can't be right... I've been actively increasing my income, retirement contributions, and haven't been spending nearly as much as my peers. After thinking on it a bit I realized that compound interest was confusing my natural intuition.

Meet Bob

Imagine we have a person with a retirement goal of one million dollars, let's call him Bob. Bob currently has a nest egg of exactly nada, and for this experiment his income and age does not matter. Bob contributes $10,000/year toward his retirement goals. He also lives in a phantasy universe where his portfolio always performs perfectly with 7% annual returns, inflation doesn't exist, and his income/expenses never change.

This is a chart of Bob's retirement progress.

Bob's retirement progress

The blue line shows Bob's portfolio value from his zero starting point to his goal of one million dollars. That's boring, we've all seen charts like that before. What we're really interested in is the red line. This line is exactly $250,000 or twenty-five percent of Bob's goal. What's interesting about this line is that Bob crosses it at year 15, about halfway through his retirement timeline of 30 years.

What this highlights, is that you shouldn't be thinking of your progress in terms of money without also accounting for time and interest. If Bob had gotten discouraged and quit over the fact that after 15 years he was only 25% of the way to his goal, he never would have made it to retirement at year 30.