In our prior post, It's OK to Put Off Retirement Savings Until You're Older - It's Easier Then..., we analyzed saving at different rates, for different time periods, assuming real returns of 7%.
The astute reader, who read our post on Sequence Of Returns Risk, would have wondered how those results would have changed given actual historic returns, which is what is analyzed below.
Savings Invested in the S&P500
The chart above is the result of simulating 30 years of saving $1000/month, savings are being invested in the S&P500, where savings start in each year from 1929-1995. Each line represents the savings growing over the 30 years for each potential savings starting year from 1929-1995. Note that real returns(inflation adjusted) are used to keep dollar value constant for all years.
The chart above is a histogram of those returns, with the savings starting year shown in each histogram box. I.E. On the left we see savings starting in the years 1950, 1952-1955 had the lowest performance, with final savings balances for those years between $527K - $629K.
Conversely, the late 1930’s was a great time to start saving, with years 1932, 1936, 1935, 1938, and 1939 resulting in savings balances of $2.27M - $2.47M.
- The constant return analysis showed a final savings balance of $1.2M
- Using actual historic returns shows final balances ranging from $527K - $2.4M, with a mean: $1.36M and median: $1.21M
- Following the same savings methodology, the luckiest people wound up retiring with 4.6 times more money than the most unlucky. ($2.4M/$527K=4.6)
Savings Invested 50%/50% (S&P500/Investment Grade Corporate Bonds)
This is a repeat of the analysis above, but now assuming the money is invested in a mix of 50% S&P500 and 50% investment grade corporate bonds. (The actual simulation uses the 10YR U.S. Treasury rates + 1.0% as a proxy for investment grade corporate bonds. Reference: AAA vs 10Y Yield.)
- Using actual historic returns with a mixed portfolio shows final balances ranging from $513K - $1.4M, with a mean: $861K and median: $843K
- Interestingly, while the general results (mean, median, maximum) were better for an all stock portfolio, the worst case results were quite similar ($512K for the mixed portfolio vs $527K for all stocks).
Takeaways
It's important to always keep in mind that while a given portfolio has a long term average return, the following apply:
- Past results are not indicative of future results
- Your mileage may vary
Fundamentally, don’t just assume you will get the average return for any given index or portfolio. History is long, but our lives are not; plan for outcomes substantially different than average.
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Disclaimer
For Educational Purposes Only: All content on this site, including articles, tools, and simulations, is for informational and educational purposes only. It should not be construed as financial, investment, legal, or tax advice. The information provided is general in nature and not tailored to any individual's specific circumstances.
Software Development Has Inherent Risks: The software used to perform the analyses may have errors or inaccuracies. When we post updates to any material, errors or inaccuracies that are subsequently fixed may change the results.
No Guarantees & Risk of Loss: The analyses and simulations presented are based on historical data. Past performance is not an indicator or guarantee of future results. All investing involves risk, including the possible loss of principal. Market conditions are subject to change, and the future may not resemble the past.
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View Video Transcript
You know, so many of us share this common goal, right? We save for decades trying to build up enough to have a really comfortable retirement. We punch numbers into those online calculators. They spit out a nice neat target number and we aim for it. But what if I told you that one of the biggest, and I mean biggest factors in how much you end up with is something you have absolutely zero control over. Today, we're going to dig into the wild, surprising role that pure, simple luck plays in your retirement. So, let's start with a really straightforward question. Imagine you are super disciplined. You save $1,000 every single month for 30 years straight. No exceptions. Does that make you a millionaire? You know, the common wisdom and a lot of the tools you find online, they'd have you believe the answer is a simple resounding yes. But as we're about to see, the real answer is, well, it's a whole lot messier than that. So, first, let's just look at that simple promise. The one that assumes everything is smooth sailing, a nice predictable journey to becoming a millionaire. Okay? So, if you assume a constant steady return of 7% a year after inflation, which is a pretty common benchmark people use, then yeah, after 30 years of tucking away a grand a month, you'd end up with a cool 1.2 million bucks. It's clean, it's encouraging, and honestly, it's the number that a whole lot of financial advice is built on. But here's the thing, and we all know this intuitively, right? The market doesn't just hand you a neat 7% every year like clockwork. Oh, no. It zigs, it zags, it booms, and then it busts. And all that messiness, that volatility, it completely changes the game. And this brings us to the absolute heart of the matter. The massive role that pure luck plays in all this. It's not just about how much you save. It turns out it's just as much about when you happen to be saving it. All right, take a look at this. It might look like a plate of spaghetti, but what you're seeing is a historical simulation. Every single one of those gray lines, that's a person saving $1,000 a month for 30 years invested in the S&P 500. The only thing that's different between all of them, the year they started saving. It's just incredible. This chart shows some people just barely squeaking over the million-dollar line, while others are way, way up there, all for following the exact same plan. So, let's try to unpack these crazy results a little more. We'll start by focusing on this all stock portfolio. You know, the high-risk, highreward approach. Now, this is where it gets really fascinating. This chart organizes all that chaos. It's what's called a histogram, and it shows the final portfolio balances. And see those little numbers in the boxes? Those are the start years for each 30 years saving journey. You can see it right away. Look at the far left. Those are the unlucky savers, the folks who happen to start in the early 1950s. And then look all the way to the far right. Those are the luckiest ones who had the incredible good fortune to start saving in the late 1930s. And the difference between them is just staggering. I mean, the unluckiest saver, who did everything right, followed the plan to a te and did their 30 years with just $527,000. Meanwhile, the luckiest saver, following the identical strategy, retired with over $2.4 million. Wow. Let me just put that another way so it really sinks in. The luckiest person ended up with 4.6 times more money than the unluckiest person. Think about that. same savings, same discipline, same investment. The only difference was a different roll of the dice on what year they happen to be born and start their career. So, if going allin on stocks is such a roller coaster, what about playing it a little safer? You know, can we tame some of that wildness by diversifying a bit? Let's see what happens. So, to test this, the source material ran the exact same simulation, but this time with a more conservative portfolio. It's a classic, a 50/50 split. half your money in stocks, the other half in highquality corporate bonds. The whole idea here is that the bonds are supposed to smooth out the ride when the stock market gets choppy. And this sideby-side comparison just illustrates the effect perfectly. On the left, you've got the all stock portfolio we were just looking at. On the right, the new 50/50 portfolio. You can see it immediately, right? The results on the right are much more bunched up. Those crazy multi-million dollar wins are gone, but all the outcomes are a lot more clustered together in the middle. Okay, let's put some hard numbers to that. So, yeah, diversifying it did exactly what you'd think. It lowered the ceiling. The absolute best case scenario dropped from 2.4 million down to 1.4 million. The median or kind of the typical outcome also fell from over 1.2 million to about $843,000. But, and this is the real kicker, look at the worst case scenario, it barely moved. The unluckiest all stock saver ended up with $527,000. the unluckiest 50/50 saver. They ended with $513,000. So, playing it safe didn't really save you from the absolute worst luck of the draw. So, what in the world is the takeaway here? I mean, if even a safer strategy can't totally protect you from a bad roll of the dice, how are we supposed to approach planning for our own retirement? Well, it really brings two of the oldest warnings in finance into sharp focus. You've heard them a million times. Past results are not indicative of future results. And my personal favorite, your mileage may vary. This historical data, it isn't a crystal ball. Think of it more like a map that shows the huge, huge range of possible destinations you could end up in, even if you follow the exact same road as everyone else. And that leads us to what is probably the single most important lesson from all of this. Don't don't anchor your entire financial future to a single average number that a calculator spits out. History shows us that our saving careers are, you know, relatively short and the 30 years we get might not look anything like the long-term market average. So, the crucial thing is this. Plan for a range of outcomes. Yeah, hope for the best, but you have to prepare for outcomes that could be substantially different and maybe a lot lower than the average. Because when it's all said and done, the only thing you can truly control is how you plan for that uncertainty.