There’s a song that was a No. 1 hit in 1954 called “Little Things Mean a Lot.” Its title could sum up today’s simple lesson.
By saving less than $100 a month, adjusting the savings for inflation, and investing well, a young person can retire with millions.
I’ve known this truth for a long time, but now I have numbers to demonstrate it year-by-year.
Using reliable data going back to the start of 1970, my team has put together five tables showing the results of accumulating money in a way that most people can accomplish.
I’ll summarize some of the key results after I tell you the assumptions in this study.
We assume that an investor sets aside $1,000 in 1970 and increases the annual savings by 3% each year to roughly keep up with inflation.
We made the calculations assuming investments were made monthly, reflecting a typical arrangement in a 401(k) or similar retirement program.
Thus in 1970, our young investor saved $83.33 each month. This monthly savings went up to $85.83 in 1971, to $88.41 in 1972, to $91.06 in 1972, to $93.79 in 1973, to $96.60 in 1974, and to $99.50 in 1975.
The monthly savings rate didn’t exceed $100 until 1976.
Let me start by presenting results of carrying out that plan when the money was invested in the Standard & Poor’s 500 Index SPX, -0.26% through an index fund with an annual fee of 0.1%.
(You may think that 0.1% is pretty negligible, but I’ll show you otherwise shortly.)
After 10 years of adding the inflation-adjusted $1,000 a year, our hypothetical investor would have accumulated $16,187. Not enough to knock anybody’s socks off. But after 20 years of this, the account would be worth $118,874.
That would have seemed mighty impressive at the end of 1989, especially in relation to the pretty modest $146.16 monthly contribution they had been making recently.
After 30 years, the account would have grown to $689,226. And after 40 years, in 2009, the account value at the end of 2009 would have been (gulp) $649,360.
Can that be right? Yes indeed, because at that time the S&P 500 was just starting to recover from the second of two major bear markets. (Each of those bear markets included a drop of 50% for the index.)
If our investor kept the faith, the account would have more than doubled over the next five years, growing to $1,352,002 at the end of 2014.
By the end of 2017, when the stock market was still going full-steam-ahead, the account would be worth nearly $1.9 million.
At that point, after 48 years, our investor would have made total contributions of $104,408.
That’s the first of two “little-things-mean-a-lot” lessons here: Small contributions can grow to become mighty sums.
Now to get back to that tiny (and necessary) 0.1% mutual fund expense ratio: It would have paid the mutual fund about $70,000 over the years. That’s a huge percentage of the total investment dollars.
That’s the second “little-things-mean-a-lot” lessons. That little one-tenth of 1% paid the mutual fund company pretty well.
(Just imagine how much this theoretical investor would have paid in fees to an actively managed fund that charged 1% a year – about $700,000!)
In return for that $70,000, the fund itself would have paid our investor quite handsomely.
You can see the specific results of our study in the table below.
But wait! It gets better. Quite a bit better, in fact.
These impressive results came from investing in only the S&P 500. For the last quarter of a century I have been recommending a worldwide equity portfolio with ample diversification, a portfolio of which the S&P 500 makes up only 10%.
Applying the same real-world data and assumptions ($1,000 going in the first year, invested monthly, with contributions increased by 3% annually) to this worldwide equity portfolio, we see that the exact same contributions would have produced considerably more money at retirement.
In addition, I am now recommending an all-value portfolio for many young investors. The same assumptions applied to that portfolio results in even greater retirement payoffs.
I’ve summarized this below in Table 1.
Table 1: Comparison of three all-equity portfolios
| Portfolio | Total savings | Portfolio value 12/31/17 |
| S&P 500 | $104,408 | $1,878,826 |
| Worldwide | $104,408 | $3,342,555 |
| All value | $104,408 | $4,443,108 |
These numbers demonstrate that, regardless of which portfolio our hypothetical investor had chosen, this long stream of modest contributions (about $83 a month in 1970 dollars) added up to a mighty big retirement payoff.
This portfolio kept growing (although not every single year, as we shall see) through three major bear markets and despite a gut-wrenching one-day drop in the market in October 1987.
The ride wasn’t entirely smooth, and our investor had to persevere through some periods when (as is true for EVERY period) the future was uncertain.
However, I think it’s very interesting to note that with the S&P 500 portfolio, the account’s year-end value increased in 41 of the 48 calendar years in the study.
The year-end value of the worldwide equity portfolio went up in 42 of those 48 years, and the all-value portfolio advanced in 43 of the 48 years.
I think it’s also interesting to note that after 10 years of this program, our investor had put in a total of $11,465.
At that point, the end of 1979, the portfolio would have been worth $16,187 in the S&P 500, $26,732 in the worldwide portfolio, or $25,864 in the all-value portfolio.
Now let’s fast-forward to the end of 1989, 20 years into the program, when the cumulative monthly savings were $26,873.
At that point, the S&P 500 portfolio would have been worth $118,874; the worldwide portfolio $238,109; and the all-value portfolio $262,327.
For a complete year-by-year breakdown of these portfolios, I suggest you check out Table A for the S&P 500, Table B for the worldwide portfolio, and Table C for the all-value portfolio.
The reported results from the worldwide and all-value portfolios assume half the portfolio was invested in U.S. funds and half in international funds.
Some people are uncomfortable investing that much of their money in companies headquartered outside the U.S. borders. For them, we have run the numbers assuming 70% in U.S. companies and 30% international.
You can find those results in Table D for the worldwide portfolio and Table E for the all-value variation.
I hope you will spend some time examining these year-by-year tables. That will give you a good idea of how all this growth occurred and how the contributions (calculated annually, made monthly, and growing at 3% a year) became larger and larger over the years.
I must remind you at this point that the past is only the past, and there’s no assurance that future returns will be similar to those of the past 48 years.
But whatever the market does in the future, it will still be true that “little things mean a lot.”
For more on how to turn $1,000 a year into millions, check out my podcast.
Richard Buck contributed to this article.