It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
—Henry Ford

If you read part 1 of this series, and thought to yourself, hm, they didn’t account for inflation, congratulations. You’re right. It’s a pretty glaring omission, I know. Everyone knows you have to account for inflation.

I’m sure you know how this story ends, but let’s go ahead and go through the motions, anyway. If you recall, our contribution rate was $1200 per year, from ages 22 to 65. We found out last time that using the more accurate CAGR instead of “average” return, we wound up with a little over $600,000 instead of the $1 million we were promised. Now let’s factor in inflation. As it turns out, the inflation-adjusted CAGR of the stock market from 1900 through 2011 works out to just 6.26%. Heading over to the retirement calculator and plugging in our new 6.26% “real” return, we wind up with only $241,751. Ouch. So much for our million-dollar retirement.

No surprises, here, right? But there’s a problem. You see, this figure is pretty much bullshit as well. To understand why, we need to look into what inflation really is, and how it’s measured. [Click to continue…]

Image by Kevin Dooley

Advice is what we ask for when we already know the answer but wish we didn’t.
—Erica Jong

Let’s say you’re just starting your adult life, and want to plan out your finances. First off, you are to be congratulated. Most people don’t put much thought into the subject until later in life, and in so doing, make things considerably harder on themselves. You plainly are much more clever than they are.

Let’s put together a plan based on the sort of generic, conventional wisdom you’ll find in endless personal finance books, Web sites, radio programs, and seminars. Let’s say you start your career at age 22, and want to retire at age 65. You’d like to earn $40,000 per year from your portfolio after you retire. Using the traditional 4% rule, that means you’ll need a nice, even $1 million to retire. How much should you save for retirement each year?

Well let’s head over to one of the many retirement calculators out there on the Web and find out. From 1900 to 2011, the average return of the stock market has been 11.37%. You can easily earn the average stock market return by buying an index fund, so let’s plug that into the calculator as your return, with $1,000,000 as your goal, and starting and ending ages of 22 and 65.

The result: you need to save less than $1200 per year! That’s the extraordinary power of compounding. Because you so wisely started out so young, time is on your side. So just start socking away $100 per month, stick it all in an index fund, and when you retire in 43 years, you’ll be all set.

That wasn’t so hard, right? There’s only one problem. It’s all bullshit. [Click to continue…]

Image by puck90

If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.
—Paul Newman

I just completed a little game of Poker with my local broadband Internet monopoly (who shall remain nameless). It all started when I had to cancel one of my credit cards due to some fraudulent charges I discovered (Hooray for Mint.com!). I had a number of auto-bill arrangements set up on the card with various companies, and updated my info with most of them, but, regrettably, I forgot about the cable company. When monthly bill time rolled around and their automatic charge failed, they were kind enough to inform me of the oversight, but not before slapping me with a $50 “returned payment” charge.

Why would they do such a thing to a loyal customer of several years, who had always payed his bills on time? The simple answer: because they can. They’re a monopoly, after all. If I want cable Internet service, I’ve got a Hobson’s Choice. (Sadly, FiOS is not available in my neighborhood.) So, I might as well just suck it up and pay up, right? After all, they hold all the cards.

Or do they? [Click to continue…]