Get new articles by email:

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning.

Join over 20,000 email subscribers:

Articles are published every Monday. You can unsubscribe at any time.

It Pays to Start Saving Early: a Realistic Analysis

A reader writes in,

In my opinion, Social Security and Medicare are likely to be around for many years to come. Still, I think it is rational for people under 30 to acknowledge that the benefits will probably be reduced, kick in at a later age, and be means tested to the hilt — thereby making it more important than ever for young people to start saving for retirement as early as they can.

Would you consider writing an article about the benefits of starting in your 20s rather than putting it off? I know there has been a fair amount written about this subject, but there can never be enough information about the power of compounding investments — especially at an early age.

Overstating the Case

It is quite beneficial to start saving early. But I find that most articles making the case for doing so are a bit unfair to their readers because they use unrealistically rosy figures in their math.

For instance, I recently came across a blog post in which the writer calculated the wealth accumulated by age 65 for an investor who makes a $5,000 contribution to a Roth IRA every year. The author used a historical stock return figure of 9.8%, showing that if the investor starts at age 22, he accumulates more than $3.3 million. By waiting until age 35, however, that number is reduced to approximately $960,000.

The message was essentially that you can be filthy rich if you start investing as soon as you finish school.

But there are two major problems with that analysis. First, it uses nominal return figures rather than inflation-adjusted figures. Because we’re talking about a period of time that spans more than four decades, this error makes the resulting figure (the wealth built by age 65) look much larger than it really is — more than 3.5-times as large, in fact, if inflation averages 3%.

Equally important: The article used historical U.S. stock returns for the calculations, implying that an investor today is likely to earn such returns with his/her portfolio. Of course, that assumption is flawed for two reasons:

  • By most estimates, future stock returns are unlikely to be as high as 20th century U.S. stock returns, and
  • Most investors don’t (and shouldn’t) use a 100%-stock portfolio. And with interest rates as low as they are, bond returns going forward are likely to be far lower than historical U.S. stock returns.

I appreciate the motivation behind such articles — it is important to get young people investing early. But what happens if we substitute more realistic return figures?

A More Realistic Analysis

The following table shows the inflation-adjusted wealth an investor would accumulate by age 65 if she invested $5,000 per year (starting at either age 22 or 35) and earned real returns of 3-5% per year.

Assumed Real Return Starting at Age 22 Waiting Until Age 35
3% $458,599 $257,514
4% $600,147 $308,507
5% $793,501 $371,494

So, yes, there’s still a large benefit to starting early. In fact, one could argue that low return expectations make it even more important to start early.

But these numbers don’t exactly strike the, “you could be rich!” chord, which is typically what such articles attempt to do.

If anything, with realistic return numbers, the appeal would more likely be to fear. It’s hard to retire on $300,000 unless you have a pension (or a part-time job) or are willing to rely on Social Security benefits for the majority of your income.

New to Investing? See My Related Book:


Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing


  1. The whole “you can be rich” theme does divert the main message. Assumptions can argued about all day long. I happen to see people who started late but were married, had nice company matches, and were able to put quite a bit away in their peak earning years and yes – they are quite well off in their early 60s. They look forward to decades of enjoyable retirement. On the other hand there are people who start early and are dealt a bad blow – medical problems, poorly structured 401(k) etc.
    One thing though – I have yet to meet anyone who has complained that they saved too much, too early.

  2. @DIY: “One thing though – I have yet to meet anyone who has complained that they saved too much, too early.”

    Agreed, yours truly included. But as DIY indicates, this doesn’t mean that one can’t “catch up” during peak earning years and therefore do as well or nearly as the early starters. Today’s early starters, too, are likely to be those recent graduates who have massive amounts of student loan debt that eat into their ability to save. And to create a savings plan at age 22 that doesn’t require periodic adjustments and re-thinking is, IMO, a naive expectation.

    @Mike: “It’s hard to retire on $300,000 unless you have a pension (or a part-time job) or are willing to rely on Social Security benefits for the majority of your income.”

    Or an annuity, perhaps. But what I am sensing from the reader’s original question, and even Mike’s table (though not the sentence I just quoted), is the assumption that one must reach a certain “magic number” and then one will be ready for a glorious retirement; otherwise, you’ll be reduced to living on canned dog food. Retirement is too often assumed to be a static affair where one starts withdrawing from a portfolio and if lucky dies without depleting all of it. That’s why I am skeptical of a lot of these retirement claims one hears; they are too often written by people who have not retired rather than those who have experienced retirement first-hand.

  3. Larry,

    I hadn’t meant “willing to rely on Social Security benefits for the majority of your income” to be a “canned dog food” sort of scenario.

    Rather, the average annual Social Security benefits are somewhere in the range of $14,000 per year. That’s more than many people would want to take from a $300,000 portfolio per year — hence the “majority” statement.

    $25,000-$30,000 of (probably tax-free) income isn’t going to be a flashy sort of lifestyle. But in most places it isn’t canned dog food either.

  4. @Mike: “I hadn’t meant “willing to rely on Social Security benefits for the majority of your income” to be a “canned dog food” sort of scenario.”

    No, I didn’t think you did, which is exactly why I added the qualifying phrase “though not the sentence I just quoted,” and why I was referring mainly to the original reader’s question. But there are lot of scare tactics out there (I won’t quote any directly, but I absolutely can if pressed) implying that unless one has $1-2 million saved by age 65, your life in retirement will be one of impoverished misery. Again, the emphasis is always on achieving a certain “number,” and not on seeing retirement as a dynamic process of managing one’s assets.

  5. Oh, sorry. Apologies for misunderstanding you. In any event, perhaps the clarification will be useful for other readers.

    For reference, I agree with what you’re saying.

  6. Furthermore, people’s capacity to save changes drastically over their working life. In one common scenario: it starts out low, goes up, goes down when kids go to college, goes up again. I’ve never seen an analysis that takes this saving capacity into account; it always seems to assume static salary and expenses.

  7. Off the top of my head, here is a baker’s dozen of ways someone can better manage assets shortly before or during retirement, even if the “number” on retiring appears low:

    1, Remember that certain expenses (like retirement contributions, payroll taxes, commuting costs, etc.) will dissipate on retirement, thus reducing the amount you’ll need.
    2. Pay off all major debt by retirement.
    3. Work a year or two longer.
    4. Allocate your investments more towards cash and other low-risk assets.
    5. Delay claiming social security to maximize your annual benefit.
    6. Do part-time consulting or other work you like.
    7. Purchase one or more single-premium immediate annuities.
    8. Purchase a charitable gift annuity or similar vehicle for planned giving.
    9. Use a reverse mortgage.
    10. Move to a less expensive state, or even another country (I hear Ecuador is cheap, though I wouldn’t go there myself).
    11. Move in with family or friends.
    12. Rent out a room in your house.
    13. Eat out less and learn how to economize by cooking less expensive but equally appealing foods.

  8. The table highlights that the investor that started earlier has nearly double the savings of the other investor, and the difference far exceeds the $50,000 cost of 10 annual $5,000 investments.

  9. First, regardless of assumptions starting early almost always gives you a leg up to starting late. But as Larry pointed out, not having the “magic number” isn’t a final nail in the coffin either.

    Frankly, we just didn’t have extra in the beginning of our lives, but now have a good company match and are able to put quite a bit away.

    cd :O)

  10. Thanks for this–I get so tired of those magic-of-compound-interest articles that don’t mention the anti-magic of compound inflation. And this one talks about not putting everything in stocks, too (although that’s probably fine in your twenties).

    Like the others have said, though, I didn’t have $5000 a year in my twenties to invest. For a while, I had a budget of $100/month after rent (for food, clothes, toiletries, and entertainment) (more like $200 or $250 in today’s dollars). Until about three years ago (age 46), I could just barely max out a Roth IRA (and those started with a max of $2000 per year).

    On the other hand, sometimes you can save some money as a teenager or at least save all monetary gifts. And I went in debt for college and then didn’t get a high-paying job afterwards. (I finally caught up to first-year teacher salaries a few years ago, then they caught up to me, then I passed them again.) So people who either don’t go to college and still get okay-paying jobs, don’t go into debt for college, or go to college and then get above-average-paying jobs could all find this a bit easier.

    And if you can afford to save $5000 per year in your twenties, you’ll probably be able to afford to continue maxing out your IRA as the limit increases over time, leaving you with more money than shown in the charts.

  11. The numbers in the blog post you reference are pretty bold in the way they ignore inflation. It hits their numbers in two ways:
    1) Both early saver and late saver save $5000 per year, despite the fact that $5000 when Mr. Early is age 22 is probably going to be the equivalent $7700 (assuming 3.38% inflation) by the time he is 35.
    2) Mr. Early has 13 more years of inflation to make his numbers look bigger.

    If btoh Mr. Early and Mr. Late save the equivalent of $5000 in today’s dollars every year (from their individual start years), at age 65 they end up with 4.7m and 2.0m respectively (in future dollars). Mr. Early ends up with 2.4 times as much money as Mr. Late. Hard to argue with that.

    The flip side is pretty unreasonable- why would Mr. Early save less real dollars every year? $5000 is suspiciously equal to the IRA annual contribution limit, which is indexed to inflation.

    On the other hand, personally I see a lot of bloggers who say things like “Future stock returns are unlikely to be as high as 20th century U.S. stock returns” without supporting that statement. IMHO, in this kind of situation, the historical number is the only one you can reasonably use. Any other number you use is made up and/or an article of faith.

  12. Steve,

    I would argue that any number you use is an article of faith. Or rather, I’d call it a guess.

    Typically, I prefer to base my guesses on something such as dividend yield, earnings yield, or PE10 rather than picking the historical return of one particular country. But, admittedly, that doesn’t help much for a period of 40+ years, because while all of those things point to lower-than-historical-average returns at the moment, they could all be predicting very different things 10-20 years from now. And it’s the returns at the end of the accumulation period (and at the beginning of retirement) that matter most.

    If I were going to use historical real returns, I’d at least use more than one country rather than just the U.S.

  13. Hi Mike,

    In your table of “real” portfolio end-values, is the $5,000 annual contribution tothe Roth fixed for each year. Or is it increase (ie, indexed) by the the 3% inflation to obtain the inflation-adjusted values in the table? Just curious!


  14. Forrest,

    The $5,000 contribution was fixed at $5,000. There was no assumed rate of inflation in any of the figures. Of course, that’s not how it works in real life — nor is the idea that a person would save the same amount, even in inflation-adjusted terms, throughout his/her entire career. I was simply attempting to make a similar comparison, just using more realistic return figures.

  15. This subject and discussion reminded me of John J. Raskob, who simultaneously held the head financial job at both GM and DuPont in the 1920s. Raskob was very bullish on the stock market in the 1920s and gave an interview to Ladies Home Journal in which he suggested every American could become wealthy by investing $15 per month in common stocks (at a time when an average American’s weekly salary was between $17 to $22). His argument also implied a rate of return greater than 25%! [ see here ]

    The article, entitled “Everybody Ought to be Rich”, arrived at newsstands just two months before the Wall Street Crash of 1929.

Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. The information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2024 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My Social Security calculator: Open Social Security