I also like to look at the long-term perspective (especially in recession years) rather than just looking at year-to-date or last year returns that are often quoted in the media. How have stable investors behaved over the past decade?
Target dating fund. The Vanguard Target Retirement 2045 Fund is a low-cost, globally distributed, all-in-one fund available to anyone who funds an IRA, even within many employers’ retirement plans. When young (he will be 40 if he retires at 65), the fund holds 90% stocks and 10% bonds. This is the default choice in a world of mundane and expensive options. This is also a good benchmark for others using low-cost index funds.
The power of consistent, tax-efficient investments. Over the past 10 years, the maximum permissible annual contribution to a Traditional or Ross IRA has been approximately $5,000 per person. The maximum permissible annual contribution for a 401k, 403b, or TSP plan is over $10,000 per person. If your household income is $67,000, $10,000 equates to a savings rate of 15%. Therefore, we use $10,000 as our base amount. This number of rounds makes it easy to multiply the results to suit your situation if needed. Can you save $5,000 a year? Halve the result. Can you save $20,000 a year? such as doubling the number.
10 years of real-life savings of $833/month. What if you invested $10,000 in the Vanguard Target Retirement 2045 Fund each year for the last 10 years?
Investing $10,000 annually ($833 per month, or $384 per biweekly paycheck) for the last 10 years gives a total balance of $145,000. That’s $100,000 in ongoing contributions and $45,000 in investment returns.
It gets even better over time. There is a famous example that shows the power of compound interest. I started saving at the age of 25, saved and invested for 10 years, then stopped. Never save a penny again They beat those who started saving at age 35 and kept saving for 30 years. Acorn provides a nice illustration:
The “Rule of 72” tells us that if your annual rate is only 7.2%, your wealth will double every 10 years from now. After another 10 years, every $100,000 will be $200,000. Ten years from now, that $200,000 will be $400,000. If there is initial momentum, it will only continue.
Here’s my previous “10 Years of Savings” post.
Conclusion. Saving now can be difficult, especially if your investment balance is dwindling. But over time, being consistent and starting early will smooth things out. You can build serious wealth with an IRA/401k plan and something as accessible and boring as the Vanguard Target Retirement Fund (or a simple collection of low-cost index funds).
