In fact, if you do the above experiment modeling a straight 7% annual real return, then you’d get only $138k, which might be more accurately reflective of purchasing power accumulated in today’s dollars going forward. It can be discouraging how slow the compound returns train is to get started, and as you note ten years worth of $10k investments is unlikely to turn into anything particularly revolutionary for most Americans. You don’t need a secret trading strategy or exclusive hedge fund manager. (Add in maxing out a 401(k) each year as well if you can.) Something as accessible and boring as the Vanguard Target Retirement Fund can make you rich.
The investment side of our path to financial freedom can be mostly explained by such behavior. Not every year will turn out to be as good as this year, but taking it all together provides a more balanced picture.Įarn money, save a big chunk of it, and then invest it in your choice of productive assets. $10,000 invested in the beginning of 2008 would have dropped down to $5,500 in value before the rebounding. Some of that money was invested right before the crash in 2008/2009, and some has only been in the market for a few years. For example, if you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, that would leave you with a gain of roughly $360,000 over the last decade (and a total balance of $760,000). With the handy tools at Morningstar and a quick Google spreadsheet, we get this:įor every $10,000 you put in annually over the last 10 years, you would have a ~$80,000 investment gain on top of the $100,000 in contributions. You’d have put in $100,000 over time, but in more manageable increments. To create a simple-yet-realistic scenario, what would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark.Ī decade of real-world savings. That means a couple could put away at least $10,000 a year in tax-advantaged accounts. For the last decade, the maximum allowable contribution to a Traditional or Roth IRA has been roughly $5,000 per person. I think it’s a solid default choice where you could easily do worse over the long run. In the early accumulation phase, this fund is 90% stocks (both US and international) and 10% bonds (investment-grade domestic and international). This all-in-one fund is low-cost, highly-diversified, and available in many employer retirement plans as well open to anyone with an IRA. There are many possible choices for an investment benchmark, but I chose the Vanguard Target Retirement 2045 Fund. You may know the 10-year historical return of the S&P 500, but most of us didn’t just invest a big lump sum of money a decade ago, and most of us don’t just invest in the S&P 500. Instead of just looking at one year of returns, here’s an annual exercise that helps you look at the bigger picture.
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