Good points.

BTW I tried to remedy the situation a bit by doing another post that provides a better long run stock market return chart and makes some clarifications.

I agree with the general premise of your post. There is a lot of variability in the outcome of your investments, even over long periods of time. To me this seems logical but maybe indeed a lot of people don’t realize this. I was just nitpicking a bit at the word “probably” in your sentence. If you would have left that out I would agree completely.

Also I thought it might be interesting to point out what, historically, the chances are of you not earning a satisfactory return. And also that even if you lived through one of the worst periods, the subsequent period would probably have been really good thanks to mean reversion as you see in 1920 and 1980.

I may be wrong in my perceptions of investor understanding… But I have two thoughts about this… First, I think lots of people (and a very active thread at Mr. Money Mustache reflects this), incorrectly assume if they just hold on long enough, they’ll get something close to the average of 6%. Your calculations amd my calculations show that’s not correct. People can’t use time to diversify… E.g., you note that nearly 30% earn 5% or less per your calcs. (I didn’t double-check your calculations, but those sound right.) That’s a pretty high “failure rate” or “disappointment rate”…

Second, there’s a meaningfully large difference in terms of future accumulated retirement savings and annual retirement income between getting 5% and getting 6% annually. Someone who saves $5500 into an IRA ends up with roughly $365K if they earn 5% and roughly $435K if they earn 6%. If you’re using a 4% withdrawal rate, the first investor gets roughly $14,600 a year and the second gets roughly $17,300.

That’s really my only point… Well, that and the fact that lots of people don’t really understand this variability.

P.S. In a post here, http://evergreensmallbusiness.com/average-retirement-savings-return/, I provide a table of my percentile rankings using the cFIREsim calculations. I calculated an the 20th percentile situation as an investor earning about 4.4%… calculated the 80th percentile situation as an investor earning about 7.2%.

Not really a myth imo. True you might not have gotten a nice market return if you were unlucky but you would have had a return of more than 5% in most cases. Using the same cFIREsim data in 72% of the cases you would have had a return of more than 5%.

Only in 3 cases of 105 you would have had a return of less than 2%. 1891-1920, 1892-1921 and 1952-1981. Luckily for you you would probably have been fine as 1920 and 1980 marked the beginnings of 2 great bull markets.

Of course who knows what the future will bring…

The returns do include include dividends on the stocks and interest on the bonds.

Regarding really early data, you may be right. But if you look at the line chart shown with the Retirement Plan B blog post (link below), you’ll note that plenty of variability exists over the whole interval where the data is available:
http://evergreensmallbusiness.com/retirement-plan-b-need-one/

Great link Harry! Thank you.

I had not seen Norstad’s excellent article before.

One comment about the bar chart he displays. I actually think that bar chart understates the variability in outcomes that individuals experience because he’s calculating the future values for a single, one-time deposit rather than calculating the future values for a series of deposits like someone would do with an IRA or 401(k).

P.S. Love the finance buff blog!

http://www.norstad.org/finance/risk-and-time.html

The bar chart near the end shows how the range increases over time.