top of page

# Your Best Chance At Long-Term Investment Success

Updated: Dec 29, 2020

# The impact of savings rates and investment rates of return.

Investors are always concerned about the returns they are receiving. How do they compare to the S&P 500? What about Apple, Amazon, and Microsoft? Many investors see the goal of investing as achieving the best returns possible, so talk consistently revolves around returns. What often gets overlooked is how much of an impact an investors' savings rate has on their ultimate account value. Suppose two individuals are starting to invest. Each has a starting annual salary of \$60,000. Each invests a portion of their salary annually for 20 years* and each sees their salary increase by 4% per year during that period. Individual A, however, saves 7% of their salary every year and earns an average annual return of 5% while individual B saves 5% of their salary but earns a 7% annual return. Which investor would you expect to have a larger balance after the 20 year period? Probably pretty similar, right? *for the purposes of this exercise, each year's annual investment is divided in half and multiplied by the assumed annual return Answer: Individual A ends up with \$198,966 at the end of year 20 while Individual B ends up with \$173,731, almost 15% higher than Individual B. Maybe that example was more obvious to people than I am assuming, so how about a second scenario: Individual A now only receives a 4% annual return, while saving 7% of their salary, and individual B continues to receive a 7% return and save 5%. Who will end up with the larger balance now? Answer: Individual A ends up with \$180,514 vs. \$173,731 for Individual B, about 4% higher than their higher return peer. Individual A's annual return has to fall below roughly 3.6% for Individual B to end up with the larger balance at the end of year 20. Put another way, if Individual A saves 7% per year and returns only 3.6% annually, they end up with essentially the same future balance as if they had saved 5% per year and earned a 7% annual return. Below is a table comparing different savings rates at different rates of return for the same salary, time period, and salary growth as the above scenario: