The Stock Market Won’t Save You; Invest Anyway

Forgive me for the somewhat splashy title on this post. And, I know, writing this post on the heels of a rough week in the stock market probably doesn’t help. But, there is an idea that I hear from time to time as I listen to financial podcasts. To be clear, I don’t hear this idea often, and it’s usually stated in some form when the markets are performing well, not poorly.

That idea is that stock market returns alone won’t make up for a low savings rate or a general lack of a financial plan to make you rich. Occasionally, I might even hear or see the exact words in the first part of this post’s title. The message is that you have to work on increasing your income and savings over time if you want to improve your financial lot in life over the longer term.

This idea got me thinking: What if I never left the Customer Service area for the Underwriting department at my current employer?

My hope is that the charts I am about to show encourage you to start investing, and look for ways to improve the amount you are able to set aside for your retirement and other goals.

The Setup…What We Can Control

My first job out of college was as an assistant manager at a movie theater making $15,600 per year in mid-1997. Over the next several months, my annual salary increased to $18,200. In early 2018, I found a job as a customer service representative with an even better income, weighing in at about $20,800 per year.

However, I wasn’t saving anything towards my future until I was 6 months into that customer service job and became eligible for the company’s 401(k) plan.

My income at the time was $21,320. (A big thanks to my employer for allowing me to see my entire compensation history.) For the following examples, I am assuming a savings rate of 9% to start, including employer contributions. (My company currently matches a 5% employee contribution with another 4% employer contribution, giving us 9% of our before-tax income going towards our 401(k).

What We Can’t Control

Now that we know how much we’re going to start saving, what about the things we have no control over. Namely, inflation and returns.

For inflation, I am going to use a range of 2-3%. The average inflation, based on the Consumer Price Index (CPI), from 1913-2013 was 3.22%, for reference. I am also using a 2-3% annual rate of increase for my income, since that is typically what I receive from annual reviews where I have not gotten promoted in some way.

As for returns, I’m going to be a little more scientific with that one. I am going with the COmpound Annual Growth Rate, or CAGR, of the S&P 500 over 2 fairly long periods of time. The first rate of return is for 1999-2019, or roughly my 401(k) contributing career, 8.29%. Our second CAGR assumption is for that of my dad’s lifetime, approximately 80 years, 11.14%. The rates of return assume dividend reinvestment.

The disparity in those 2 rates of return is that I have had the privilege of working and saving during both the bursting of the dotcom bubble in the late 1990s/early 2000s AND the Global Financial Crisis (late 2007 to early 2009).

Results: Part 1 – Start at 9%; Stay at 9%

First, we’re going to assume that I had stayed in the same job, gotten annual income increases of 2-3%, and never increased my level of savings above the 9% that I started with.

Fig 1.1: 9% 401(k) contributions throughout a 40 year career. Income increases of 2-3% each year.
Fig 1.2: 4% annual distribution amounts at retirement, along with adjustments for our inflation assumptions.

As you can see, the results range from somewhere near depressing to roughly adequate.

For the illustrations above, I assumed annual withdrawals (or distributions) from this retirement account. There are some flaws that go with the 4% distribution, but that’s another discussion for another time.

Also, note that I am applying the annual returns uniformly over the entire 40-year period. In reality, there are fluctuations that sometimes helps and other times hurt. These fluctuations are impossible to predict, and I can’t find a tool to show me the last 20 years (which gave us the 6.68%) with these fluctuations applied to my contributions.


As you can see, that 4% withdrawal from retirement accounts has a wide range of possibilities. Specifically, this range is from $19,813.54 to $76,229.73. The spending power of those numbers gets eaten up by inflation to give us a range of $6,073.98 to $34,523.71. While half of the results give me spending power around the $21,320, all of those use the CAGR of 11.14%, which hasn’t happened for me over the last 20 years.

We also have to realize that we won’t invest in only the S&P 500 over our entire career. We’ll be more aggressive at the beginning, and probably get a bit more conservative over time. How this impacts our returns, overall, depends on how you invest. And, of course, we can’t control how much our investments grow no matter what we do.

But, there is something we can do – increase our savings rate.

Results: Part 2 – Start at 9%; Finish at 15%

While I’m staying in my customer service job for this post, and I’m not getting any big salary increases from promotions and what have you, I will assume that I increase my savings rate by 1 percentage point each year until I’m saving 15% of my income (including what my employer puts in).

While I know it would have been difficult to do with only a 2-3% pay increase each year, I am assuming these savings increases occur during the first 7 years of my career. This gives us the best-case scenario.

Fig 2.1: 9% 401(k) contributions increasing to 15% in working years 2-7. Income increases of 2-3% each year.
Fig 2.2: 4% annual distribution amounts at retirement, along with adjustments for our inflation assumptions.

Hey, look! The numbers went up!

Oh…we knew that was going to happen.

While the spending power estimates in those last 2 columns still show that only half of our assumptions give us amounts above our starting point of $21,320 per year, those amounts are all comfortably higher.

All of our numbers have increased by about 50%.

Now, I know it’s not easy to increase what your saving when you’re salary isn’t all that great. If you have to delay a savings increase here and there, your results will end up somewhere in between. But, I still think these numbers show how some small changes over time can have big impacts.

Now, imagine increasing your income by moving up the corporate ladder, changing career paths, or even starting your own business (side hustle or otherwise). Planning for the future has a lot of unknowns; do all you can to take care of the things you have control over.

If you haven’t started, yet. It’s never too late to start.

Thank you for visiting Finunciate. Come back soon.

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