Unequal Returns


Today I brought you the story of four hypothetical savers to show how timing can be unlucky for some investors who are saving for retirement via the stock market. If you’re building retirement savings little by little over decades, it matters a great deal not just what the stock market or other investments return, but when those returns materialize.

I used a stylized example with some unrealistic assumptions, like one where the market is flat for 25 years and then rises 50 percent for five years straight. It’s more useful to look at how this pattern has actually played out in the past, using real returns in the stock market.

There are two major elements of luck for an investor who just wants to stash away money for retirement. First, the total return of the market during the time period when you’re saving. Second, the timing of those returns.

In data that goes back to 1928 (it’s the Standard & Poor’s 500 with reinvested dividends), the stock market has offered pretty strong inflation-adjusted returns for every possible 30-year stretch of time, ranging from 8.4 percent a year for the 30 years beginning in 1929 to 13.9 percent a year for the 30 years starting in 1942.

But it also matters what the pattern of returns was within that 30 years in determining what a typical saver ends up with when it’s time to retire.

We simulated a scenario in which a person begins saving $10,000 a year in 2013 dollars every year for three decades. And it shows how important timing can be in shaping how much money a person has for retirement after a lifetime of diligent savings.

The best news was for somebody who began plowing money away in 1969 and then retired in 1999. Such an investor benefited from very low returns in the early 1970s when first building up savings (meaning he or she was investing in those early years at low valuations), and then from the entirety of the market boom of the 1980s and 1990s, before cashing out at the peak. In such a case, $300,000 invested became a whopping $2.57 million (both numbers are in 2013 dollars).

The opposite was somebody who started saving in 1951 and retired in 1981. The total return of the stock market over that time wasn’t bad: a 10 percent annual inflation-adjusted growth rate. The problem is that the returns were concentrated in the first years that investor was saving, before much money had accumulated. By the time savings had built up, it was the 1970s, a terrible period for stocks. As a result, that investor, who saved the same $300,000 as the person who retired in 1999 at the same rate, ended up with only $532,000 in retirement savings.

That person, who would seem to be a perfect age to benefit from a rising stock market in the post-World War II era, by dint of unlucky timing was in rough shape. A person who started saving in 1928, right on the cusp of the Great Depression, actually did better; the stock market returned a bit less in the 30 years starting in 1928 than in the 30 years starting in 1951, only 9.5 percent per year. But because the returns were backloaded, a person who started saving $10,000 a year then ended up with $1.96 million in the bank, almost four times as much as the person who started in 1951.




