The Tipping Point: When Growth Outpaces Savings

by Paul R. Ruedi, CFP®

 As a financial advisor in my 30’s, I am always looking for ways to explain just how beneficial saving early is to people my age. Unfortunately, talking about the growth that takes place over a 30-year period versus a 20-year period just doesn’t get their attention as much as I would like. So I started thinking about a different savings milestone: the point at which the growth of your current savings will actually exceed the amount you save annually. It is at this point that you will really start to feel like your money is working for you.

Suppose a person decides to save $10,000 per year for retirement. If that money is invested in a stock portfolio that grows at a 10% annual rate (this is just below the historical long-term average return of the S&P 500), it would only take eight years for that person’s total savings to exceed $100,000. Given that a 10% return on anything over $100,000 is over $10,000, this person would expect the growth of their current portfolio to exceed their annual savings from that point forward.

Yes, this was an over-simplified example, as stocks cannot be expected to produce anything close to their “average” returns even over a period as long as eight years. But the mathematical truth remains the same: it can take less than a decade for your existing savings to start driving more of your portfolio growth than your annual additions. Someone my age could easily be at the point where their portfolio growth exceeds their annual savings. I know several people who have done it. I also know people who have not saved anything and really need to start.

I think the example above shows that second group what they have missed out on over the last eight years. But hopefully rather than discourage them, it will motivate them not to make the same mistake twice. If you want to get to the point where your money works harder to build your wealth than you do, start saving and investing as soon as possible. If you need help with that, you may want to talk to a financial advisor.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.