5% after inflation is a rule of thumb he has for a long term investment portfolio. He talks about it more here: http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-s... . I'm not sure what the US saving rate has to do with anything.
- buying a conservative dividend-paying stock index fund – go to Vanguard.com and start an account to buy some units of the VFINX fund, or if you have a brokerage account you can buy SPY shares. - last resort: just putting the money into a cash account that pays the highest level of interest you can find – Vanguard’s Prime Money Market fund or ING Direct’s Orange Savings Account.
VFINX is a -0.76% for 5 years ING Orange is currently at 0.80%
How can you assume 5% after inflation? That is no different that assuming that home prices will go up by 2-3% a year. It sounds reasonable but there is no way of knowing exactly how that will play out.
Even on a 30 year timeline, you can find runs where the average return is less than 8% (just as you can find periods where the return is greater). That doesn't mean it's not a reasonable forecast of what you can expect.
It is interesting that you bring up cherry picking because that is exactly how mutual fund companies work. They have a lot of funds, the funds that do well stay around and the funds that do not do well are canceled. This fund that I mentioned is only 8 years old. Knowing which mutual funds are going to produce over 30 years is like knowing what stocks are going to produce over 30 years. You can 'cherry pick' examples for 8% or -8%, but it is crazy to assume that the fund you pick is going to get 5% over inflation over 30 years.
I think you're missing something here. Nobody is talking about picking actively managed mutual funds (which you're right, are a total gamble/ripoff). The Vanguard fund mentioned above is an index fund. It's not at all crazy to assume that by picking the world's biggest index fund, you are going to get 5% over inflation over 30 years.
Pricing in the future growth in equities =!= no more growth...
http://www.accountingtoday.com/debits_credits/Taxpayers-Stra...
Australian banks pay 5.5% PA. The exchange rate can vary 1-2% per day, and trying to predict long term trends is difficult at best.
(I'm Australian if it matters)
But it's all about risk. If you want 0 risk to your principal, you are going to get 0% interest rate. If you put your money in the bank where it is (hopefully) FDIC insured, you get a bit of risk but not a lot, so you get a bit of interest. Since risk and reward (your interest) are correlated, the higher your return (8% compounded before inflation) the higher risk bracket you are in.
If US interest rates go up, the bank savings rate will go up as well, making it easier to get to 8% annual compounding rate with little risk. That means any other type of investing (equities, etc) will become less risky at the 8% level (but not without some risk).