Let's say you're 25. Close your eyes for a moment and try to
imagine what it would be like to be 75.
You couldn't do it, could you? What you may not realize is
that when your parents were 25, they also couldn't imagine being
whatever age they happen to be today. That's why asking you to
save money for your retirement is like asking you to give money
to a stranger.
So let's think about this in a different way. Start by
assuming that you will enjoy pretty much the same things 50 years
from now that you do today. You may be older, but
are still you. If you like going out for a beer, burger and a
movie today, the odds are you will still enjoy it 50 years from
now. So how much will it cost the future you and what do
you need to do to ensure that you will still enjoy yourself?
Let's look ahead by looking back. Based on a little web
research, I found that in 1964, a movie cost $1.25, a beer cost
less than a dollar, and a burger and fries in a midrange
restaurant cost around $1.50. This
states that US inflation from 1964 to 2014 was 4.12% per
year. So let's run the numbers and see if that rate of
inflation sounds about right:
That sounds reasonable enough. You could spend less and you
could spend more for your night out in 2014, but this quick
calculation tells us that we are in range. So while we all know
that past performance is no guarantee of future results, let's
use the same inflation rate to ballpark the future cost of a
It may be depressing to think that an evening that costs less
than $30 today could cost your future you around $200 in
retirement. It shouldn't be, because there is potential good news
as well. The good news is time is on your side - if you use
If you put aside the price of a burger, beer and movie today
in a tax deferred retirement account, and your investment keeps
pace with inflation (in our projection, a 4.12% annual return)
you will have what you need for your night out in 2064. But it
, the average annual
total return for the S&P 500
for the last 50 years was 9.7%. That's more than twice the rate
of inflation. So someone who put aside half the price of a
burger, beer and movie in 1964, invested in something that
approximated the total return of the S&P 500 and let time do
its work, would have more than enough for their night out in
2014. If they had put aside the full price, they may have enough
to bring a date.
You will still be
in the future. Saving for retirement isn't an abstract exercise.
It's making sure you can still do the things you enjoy even after
you've stopped working. And the more your investment return
outpaces inflation, the greater "discount" you can get on your
future night out. You will be thanking yourself later.
Chip Castille, Managing Director, is head of the BlackRock
US Retirement Group. You can find more of his posts
Investing involves risk including possible loss of
principal. The S&P 500 is short for the Standard and
Poor 500. It is a
market index that seeks to represent the whole stock market. It
tracks the 500 most widely held
. Index performance is shown for illustrative purposes
only. You cannot invest directly in an index.