Last week I tweeted that Mrs. Groovy and I hit a milestone of sorts. We now have over $500K in our retirement accounts.
I found this achievement to be rather remarkable for two reasons.
First, we haven’t had our retirement accounts for very long. We opened our Roths in June of 2006. Mrs. Groovy began investing in her company’s 403(b) plan in June of 2006 as well. I didn’t start working for my current company until July of 2007. I began investing in my company’s 401(k) plan in December of 2007.
Second, we really haven’t sacrificed much in order to accumulate this small fortune. We live in a nice home in a nice neighborhood. We have a nice, if old, car. And we have spent roughly $6,000 a year on vacations.
So how did it happen? How did we accumulate half a million dollars in our retirement accounts in eleven years? And was this feat really so remarkable?
Here’s a breakdown of how our retirement accounts were funded. We’ve maxed out our Roth contributions since their inceptions. We only began maxing out our workplace plans since 2014. But every year prior to that we increased our contributions by at least one percent. Of the $504K in our retirement accounts, $295K has come from our contributions. The rest has come from employer matches and Mr. Market (dividends and capital appreciation). So in other words, we purchased a $504K nest egg for $295K. Not bad, in my book. A deal like that almost makes me feel like a one-percenter.
Retirement Account Balances as of May 31, 2016
|Account||Our Contributions||Employer Contributions||Mr. Market's Contribution||Total|
|Mr. Groovy's Roth||$57,208||0||$32,431||$89,639|
|Mrs. Groovy's Roth||$57,208||0||$35,886||$93,094|
|Mr. Groovy's 401(k)||$108,107||$17,950||$37,332||$163,389|
|Mrs. Groovy's 403(b)||$72,765||$40,921||$44,110||$157,796|
But, again, is turning $295K into $504K over 11 years really something to pound one’s chest over?
Using a crude ROI tool, I plugged in the above numbers to see how we did relative to the market. Here are the results.
An annualized return of 8.34 percent strikes me as rather good. But what’s the ROI when we factor in employer contributions? To find out, I simply combined our total contributions with our employers’ total contributions and plugged that number into our ROI tool. Here are those results.
An annualized return of 5.73 percent is not so hot. No Warren Buffet are we. Mrs. Groovy and I did much worse than the market. The S&P 500, for instance, had annualized returns of 8.47 percent during this period. (To get this figure, I googled the yearly returns for the S&P 500, added those yearly returns together for the period in question, and then divided that sum by eleven. Note: the 2016 return is as of May 5, 2016.)
S&P 500 Annual Returns Since 2016
So why did we do worse than the market? Well, we certainly didn’t sabotage our returns by trying to beat the market. Our retirement account contributions have gone almost exclusively to low-cost index funds. But a number of these low-cost index funds have been focused on bonds and international stocks. Bond index funds, especially in a low interest rate environment, aren’t going to perform as well as the S&P 500. And international stocks haven’t had a good run of late. My guess is that if I controlled for bonds and international stocks—that is, if a third of my benchmark included bonds and international stocks, the “market’s” annualized return would have been in the neighborhood of six percent. So our annualized return over the past eleven years really hasn’t been that subpar.
When I tweeted last week that we accumulated over $500K in our retirement accounts, I really was patting ourselves on our backs. I thought we did something pretty amazing. After all, how many people do you know who have taken the balance in their retirement accounts from zero to half a mil in eleven years? But after I analyzed the numbers, and figured out what we invested and what returns those investments generated, I quickly realized that what we did was hardly worthy of a standing ovation. Any well-manicured ape could have turned $300K into $500K over eleven years by simply investing in a 70/30 portfolio consisting of one S&P 500 index and one intermediate bond index.
Okay, we’re average. No investing prowess here. But just because we aren’t masters of the universe doesn’t mean our investing story is devoid of any worthwhile takeaways. Here, then, are the key takeaways from last week’s retirement savings milestone.
Take advantage of employer matches. Because our workplace retirement plans came with employer matches, we were able to boost our annualized return from 5.73 percent to 8.34 percent. That’s nearly a 3 percentage point difference. Or look at it this way. Because of employer matches, we were able to create a less risky portfolio (i.e., more bonds), but still get an S&P 500-like return. How freakin’ cool is that? So by all means, if your employer offers a 401(k) or a 403(b) with a company match, jump on it. Not only is it free money, but it’s a great way to turbocharge your investment returns.
Get out of debt, and stay out of debt. Over the past eleven years, we’ve been able to put, on average, $26K annually into our retirement accounts. We’ve also been able to fund a two-year emergency fund and put a sizable chunk of money into a couple of brokerage accounts. And this isn’t because Mrs. Groovy and I have killer salaries. Our household income over this time span has gone from $90K to $120K. But we’ve been able to save half our household income since 2006 for one simple reason: that’s the year we became completely debt free. And once you rid yourself of mortgages, car loans, student loans, and consumer debt, it’s amazing how much money you can save.
Automate your savings. Habits are destiny. So it makes sense to automate good habits whenever possible. By doing this, you drastically limit the number of times you have to decide between having fun and doing what’s right. In other words, you give your discipline muscles a fighting chance.
Workplace retirement plans are a great way to automate savings. Currently, Mrs. Groovy and I each have over $900 deducted from our bi-weekly paychecks to fund our respective workplace plans. Would we be able to save this much without automation? I doubt it. We are human, after all. And this means we’re just as capable of rationalizing excess as the next guy (hey, that 50-inch flat screen only costs a few hundred dollars more than the 32-inch). But because roughly $3,600 has been automatically removed from our monthly take-home pay, Mrs. Groovy and I are forced to temper our spending habits (the 32-inch flat screen will do just fine, thank you).
Start early. I know, I know. It’s an old saw. But time in the market is your most formidable ally. Don’t waste it. If Mrs. Groovy and I had started our investment careers at 35 rather than 45, we could have easily shaved five years off our early retirement date.
OK groovy freedomists, that’s all I got. What about you? Are you saving enough? Can you do better? How’s your rate of return? Is it better than ours? Please let me know. I’d love to hear how you’re doing.