Inspired by the must-read “A Story of a F-Off Fund,” we look at how life may turn out with and without an investment plan…
Your Story 1.0
People should know the following about you: You get **** done. When your credit card debt became a problem (as in, you were carrying a four-digit balance for several months in a row), you gave up on some of the fun stuff and took care of it. You built your emergency fund, that three-to-six months of cash that’s there for a rainy day — or a hurricane.
Meanwhile, you know it’s important to save for retirement, though you’re not sure how much money you’ll want or need by then. So when you turned 30 you committed to contributing the maximum amount — $5,500 a year — to a traditional IRA. You feel unstoppable. You feel like Beyoncé. You feel like the mother of dragons. You feel like financial control personified.
One day, your friend mentions investing, and you consider it. Briefly. Then you think about 2008, Bernie Madoff, and the President’s market-moving tweets. #ThanksButNoThanks (Yes, you’re investing through your IRA, but that just feels…different.)
Some time passes, and you and your spouse decide to buy a house. You’ve been saving, but homes in your dream neighborhood have become pretty expensive. “It’s like Brooklyn,” you say. “Or San Francisco,” your spouse chimes in. You think how you should have saved more money each month and that it would have been helpful to have some guidance on how much to save.
Still, you buy a house. You and your spouse empty out your savings (which gives you several sleepless nights in your new casa). But you say it was worth it because you wanted your down payment to equal at least 20% of your home’s value since that gets you a better interest rate on your mortgage. And a home is an investment after all.
Skip ahead in your career. (You’ve had a kid by now, by the way.) You have an uncomfortable conversation with your boss about the raise you deserve. You don’t get it, so you get a new job instead. You negotiate as soon as you get the offer because — just like you vowed to never get into credit card debt again — you also refuse to be seriously underpaid.
Negotiation skills for the win — you get a huge salary bump. Which is great because you have to pay for the kid’s music lessons, summer camp, physical therapy after that injury during regionals (that ref totally blew the call, by the way), college eventually, etc.
Then, before you know it, you’re 67. You retire. And that IRA you maxed out for the past 37 years now totals just above $620,000*. Not bad — with Social Security, you’ll have $99,000 in annual retirement income. But did you know that it may be possible for you to end up with almost twice that $620,000 in retirement?
Your Story 2.0
Let’s look at how that might happen. Back to the early years. You get **** done, and “shoulda, coulda, woulda” — these words aren’t in your vocabulary. When you racked up credit card debt, you took care of it ASAP. That meant waiting to build your emergency fund. But you were fine with it since you know paying off your credit card sooner would save you money in the long run.
You turn 30, decide to open a traditional IRA, and vow to max it out every year. You’re making $85,000, so that $5,500 max is equal to roughly 6.5% of your salary. That sounds good (and it’s manageable), but, then again, you don’t really have a sense of how much money you might want or need for retirement.
One day, you’re on Facebook and stumble upon an article about some 20-something who bought an apartment in New York. The article is 100% ridiculous, but it inspires you to look into a financial plan so you can work toward making your goals a reality. Those goals: buying a house, affording a retirement with trips straight out of National Geographic, and raising a kid.
You remember your friend mentioning investing not too long ago, and you decide to check it out — turns out you can get an investment plan for your goals through a digital investment advisor. So you get yours. Best part? It includes recommendations for how much money to aim for with each goal and how much you should invest each month to try and reach that goal target.
The recommendations are helpful. They even include how much money to put into an investment account — so you’d have that and your IRA — for a better shot at that National Geographic retirement. The plan suggests you deposit 6.5% of your pre-tax salary into that investment account each year. That’s equal to roughly $5,500 while you’re making $85,000, but it will grow as your salary increases.
Still, to be honest, investing kind of makes you nervous…2008? Bernie Madoff? The President’s market-moving tweets? But you realize that you’re already investing through your IRA. And you feel pretty awesome doing that — especially since you’re on track to max yours out this year. Also, you know there’s just no way that your savings account with its barely-there interest rate is going to give your money the chance to really grow.
And you read a chapter on investing in a guide that wants to help you take financial control. Let’s look at two scenarios, it says. In the first, you’re making $85,000 and spend the next 40 years saving 20% of your salary. In the second, you’re investing 20% of your salary in a low-cost, diversified investment portfolio over the same period. Depending on the markets, the article estimates you could have an extra $1.1 million or more to your name by investing instead of saving for 40 years.**
And the price of real estate in your dream neighborhood is skyrocketing. “It’s like Brooklyn,” you say. “Or San Francisco,” your spouse chimes in.
And you read that New York Times article about motherhood costing women money over their careers all the way through retirement, and you’re determined to not to let the messed-up playing field turn you into a statistic and hurt your retirement savings.
And “shoulda, coulda, woulda” — these words aren’t in your vocabulary.
So you take the plunge and invest. You want to give your money a chance to earn returns…and you know the earlier you start, the more returns you may be able to earn on your earlier returns. You start with retirement — depositing the 6.5% as recommended — to test the waters. Then you add the home goal and invest toward your down payment.
You check your investment accounts periodically. Sometimes they’re in good shape, other times less so — and you get really nervous the first time you experience a market downturn, so much so that you seriously consider withdrawing your money. All of it. Sure, your savings account doesn’t come close in terms of growth potential, but you also never have to worry about losing money either.
But then you read an article on the importance of staying invested during the rough times, and you decide (after a bit of back and forth) to leave your money alone. Actually, that’s not true — you keep up your regular deposits, so you end up investing even more of your money. In particular that means you keep maxing out your IRA and depositing an additional 6.5% of your salary into your retirement-focused investment account.
Then, before you know it, you’re 67. You bought a home (though what you end up buying depends on how the markets affected your down payment), you raised the kid (it wasn’t easy), and now you’re retiring.
And should the markets allow, your retirement savings, through your IRA and investment account, will total roughly $1.2 million.*** That could be twice the amount you’d have if you just stuck to maxing out your IRA. Which means you could have around $130,000, with Social Security, in annual retirement income. That’s an extra $40,000 — compared to what you might have had if you only maxed out your IRA — you could spend each year (hello National Geographic retirement).
So you think, from time to time, just how nice it is to know that you invested in your goals. That you had an investment plan and stuck to it. And you feel unstoppable. You feel like Beyoncé. You feel like the mother of dragons. You are financial control personified.
(And that personalized investment plan that helped you invest in your future? You can get yours once you sign up with Ellevest. And it’s always free because what’s most important to us is that you’re planning for your future.)
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.
Disclosure: The $620,000 result assumes you contribute the maximum contribution allowed into a traditional IRA starting at age 30 and ending at age 67. The account is invested in a 97% equity portfolio which grows more conservative over the investment horizon. The results were determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios through hundreds of different economic scenarios to determine a range of possible outcomes. You are estimated to have $620,000 or more with a 70% likelihood, or in 70% of market scenarios. The results include an Ellevest advisory fee of 0.50%, and the impact of inflation.
Disclosure: We assume the bank savings account yields a 1% average annual cash return and has no account fees. For investing, we assume an investment with Ellevest using a low-cost diversified portfolio of ETFs beginning at 91% equity and gradually becoming more conservative during the last 20 years, settling at 56% equity by the end of the 40 year horizon. These results are determined using a Monte Carlo simulation — a forward looking, computer-based calculation in which we run portfolios through hundreds of different economic scenarios to determine a range of possible outcomes. The results reflect a 70% likelihood of achieving the amount shown or better. Results include the impact of fees, inflation, realized capital gains, and taxes on interest.
Disclosure: The $1.2M result assumes you contribute the maximum contribution allowed into a traditional IRA starting at age 30 and the same amount into a taxable investment account until age 67. Both accounts are invested in a 97% equity portfolio which grows more conservative over the investment horizon. The results were determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios through hundreds of different economic scenarios to determine a range of possible outcomes. You are estimated to have $1,2M or more with a 70% likelihood, or in 70% of market scenarios. The results include an Ellevest advisory fee of 0.50%, the impact of inflation, and year to year taxes on interest, dividends and realized capital gains on the taxable account.