This is the problem. $200k in 2020 dollars wont mean much 40yrs from now. Similarly, $60k sounded like a huge figure in 1980 for retirees planning for 2020. For a proper comparison, you'd need to compare purchasing power of $60k to a retiree today vs $200k to a retiree in 2060 -- i'll bet it is about the same!!!
Inflation is a huge unknown here. My parents' home in 1981 was $35,000. The same exact house today is over $1,000,000. Rent used to be $150 to $200/mo. The same rent today is over $3500.
I did a monthly $100 contribution at 6% assuming tax free comounding for 40yrs and came up with your figure of $200k. That is right -- you'll have $200k at this rate. But in the year 2060 that might be just a year of rent and you're broke!
I hope this doesn't come off as condescending, but I think you are missing the distinction between real and nominal value. if I just say "$200k" without qualification, that is a nominal value. if I associate that nominal value with an instant in time (a whole year can be a narrow enough window when inflation is reasonably low), it becomes a real value. when I say you would have $200k in 2020 dollars in forty years, inflation is already taken into account. if a dollar is worth half as much in 2060, I'm saying you would have $400k in 2060.
you are right that inflation is a huge unknown. if inflation goes up massively without a corresponding increase in nominal returns (unlikely, but possible), it would make that 6% figure incorrect. in this case, you would have less than $200k 2020 dollars in 2060, but the real value of a 2020 dollar would not have changed.
as a concrete example, suppose I own a three shares of microsoft stock and you have a brand new ipad air. both are worth about $600 today. if I offered to trade you my microsoft stock for the air, you might be happy to do so if you don't have any use for the ipad. if the fed prints trillions of dollars overnight causing the value to collapse, it doesn't change the fact that my three MSFT shares have roughly the same real value as the ipad. "2020 dollars" is just a slightly more abstract way of describing this dynamic.
Fair, but i'd say the 6% assumption is suspiciously high in that case. I think you might be doing something like ({mean SPY return} - CPI)
Except that CPI is a deviously misleading number. I wonder if the same approach applied in 1980 would come close to aligning with 2020 numbers (including healthcare, college, rent, energy, etc.)
Please be brutal in your response, I want to understand if my understanding of this is all wrong!
keep in mind, this is really just a back-of-the-napkin calculation. I'm certainly not an expert on the matter, but AFAIK 6-7% is generally accepted as the real rate of return on the S&P 500 (at least historically and over long periods of time). inflation calculations are always kind of messy thing though. in reality, some goods/services increase in price much faster than others, and CPI will be very sensitive to what goods/services you choose for your basket. even when you take into account overall inflation, college tuition is vastly more expensive than it was a few decades ago. it also gets tricky when you consider that the quality of goods can increase over time. a mainstream CPU costs about the same as it did in 2000, but is way more powerful. is that deflation, or is technological advancement a separate thing? I never got far enough in economics to know the answer.
This is the problem. $200k in 2020 dollars wont mean much 40yrs from now. Similarly, $60k sounded like a huge figure in 1980 for retirees planning for 2020. For a proper comparison, you'd need to compare purchasing power of $60k to a retiree today vs $200k to a retiree in 2060 -- i'll bet it is about the same!!!
Inflation is a huge unknown here. My parents' home in 1981 was $35,000. The same exact house today is over $1,000,000. Rent used to be $150 to $200/mo. The same rent today is over $3500.
I re-ran your numbers here: https://www.investor.gov/financial-tools-calculators/calcula...
I did a monthly $100 contribution at 6% assuming tax free comounding for 40yrs and came up with your figure of $200k. That is right -- you'll have $200k at this rate. But in the year 2060 that might be just a year of rent and you're broke!