Updated: May 11
Do you know how important it is to save money and make regular additions to your retirement account?
I'm not being condescending here, I understand that everybody out there knows the more they save the more they will have. My question is, have you ever actually calculated the additional compounding effect of adding money to an investment account? Have you ever seen it illustrated in a chart? For most people the answer is likely no, so let's do it today :)
Whenever I am showing long term investment results I like to be as realistic as possible. The VTS Total Portfolio Solution has returned nearly 20% a year in live trading since it launched in January 2012, but I don't just plug that number in for the calculations. Now I'm confident my performance will continue many years into the future, and remember we also have the leveraged versions of the strategies that should allow even higher probability of outsized return, but it's always best to default to conservative numbers so I like to use a 1% a month as the baseline.
Making an average of 1% a month for 25 years should allow nearly everybody to retire a millionaire which is why I use that conservative number for our calculations. Just for reference though, here's our portfolios:
The first chart that I will show you is what happens when an investor starts with 25,000$, adds just 300$ a month to their account, and earns a long term average return of 1% a month:
Now obviously everybody knows adding money will mean the investor has more money at the end of 25 years, but look closer.
- Without monthly additions: 469,711,66$
- When Adding 300$ a month: 1,033,365.64$
90,000$ of that money was from the 300$ per month that's added so we can subtract that from the final total so we're just comparing capital earned from direct investing activity. As you can see, the investor that added just 300$ a month would have DOUBLE the retirement account.
- Final value after deducting the added funds: 943,365.64$
The original 25,000 compounds at 1% per month, plus each 300$ addition also compounds at 1% per month going forward, massively accelerating the growth of the account.
Now let's see what happens if the investor can live below their means and add 1,000$ / month instead:
- Without monthly additions: 469,711.66$
- When Adding 1,000$ a month: 2,348,588.28$
300,000$ of that money was from the 1,000$ per month that's added so we can subtract that from the final total. Now the investor who added money will have more than 4 times the fund size.
- Final value after deducting the added funds: 2,048,588.28$
Want me to really blow your mind? Now let's assume that the investor (or household with two contributing) is able to save 3,000$ a month. I understand that a household saving 36,000$ a year won't be realistic for everybody, but the point of this article is the more the better. Let's say they do save 3,000$ per month:
- Without monthly additions: 469,711.66$
- When Adding 3,000$ a month: 6,106,251.54$
900,000$ of that money was from the 3,000$ per month that's added so we can subtract that from the final total. Now the investor/household will have more than 11 times the retirement account. 11 times!
- Final value after deducting the added funds: 5,206,251.54$
As I said, it's obvious that people who add money to their investment accounts will have more money in retirement, everybody knows this. But did you know it makes that much difference? Did you know you could retire with 5-10 times more money by still getting the exact same rate of return?
Most investors assume that to retire a multi-millionaire you need to chase some exorbitantly high rate of return. They assume people who have 5-10 million dollars in retirement must have been an early investor in Amazon, or maybe they were a high paid surgeon or lawyer. Maybe they inherited the money, or maybe they won the lottery.
Or maybe... It's just someone who had a good job, earned a roughly 12% annual rate of return, lived below their means, and consistently added a few thousand dollars to their investment account?
We're a team, and to get you to the multi-millionaire finish line we both have to contribute. My job is to keep doing the work to get everybody in the VTS Community a higher than 12% annual rate of return, and hopefully much higher than that. Your job is to live below your means, save money, and keep making regular additions to your retirement account. If we both do our jobs successfully there's no reason in the world why all of you can't retire in complete comfort.