Treavor Dodsworth CFP®, CPA, CKA®
#25 - Rate of Savings vs. Rate of Return
Okay - this one is on the nerdy side.
To spare those of you who are not nerds, the main point of my ramblings below is that for most people, the percentage of income they are saving is more important than their investment rate of return.
And now the nerds can continue reading below-
Charlie Bilello posted the following table in 20 Rules for Markets and Investing.
Note: Savings amounts in the table are based on after-tax median household income (about $53,600). None of this analysis factors in taxes or inflation.
You can see from the table that 8% savings / 1% return gives you a higher account balance than a 1% savings / 8% return.
The general result holds regardless of income. Below is the table based on $150,000 income:
One variable that does change the picture is time horizon. After about 48 years, 1% savings / 8% return does outpace 8% savings / 1% return. When comparing 1% savings / 10% return to 10% savings / 1% return, the breakeven is about 42 years.
The rate of return obviously has a significant impact. But even if you are unsure of how to invest, take encouragement from the fact that just setting aside the money is over half the battle.
Interesting Article(s) or Video(s)
A Wealth of Common Sense - Putting the Next Market Downturn into Perspective
Ben takes an interesting look at market downturns. He shows how a drawdown would be similar to us going back in time.
Thank you for reading! Do you think rate of savings or rate of return is more important?