Retirement: Steady Savings, Market Returns and Patience

May 2012

Consider the case of a 25-year-old who decided to quit smoking a pack of cigarettes a day back in 1972 (40 years ago).  Using reasonable assumptions for the cost of cigarettes (and cigarette taxes) over the last 40 years, if this person saved the cost of a pack-a-day in a retirement account that averaged 10% annual returns, he or she would have amassed about $140,000 by now.  Such is the remarkable power of consistent saving and long-term compounding.  There are many other examples of small efforts that can result in large cumulative returns.  For example, the yearly difference between packing a brown-bag lunch to work versus buying lunch at a hamburger or sandwich shop can be in the same range as the yearly cost of a daily pack of cigarettes.  Further, turning down just one cup of coffee per day at a specialty coffee store can result in similar savings.  You can probably think of more examples.  Cumulatively, the result of consistent small saving behavior over a working lifetime can yield large amounts for most Americans.  Put differently, steady saving combined with patience and market returns is a winning combination.  Of course, those who commit themselves to larger savings efforts through their 401(k)s, pension plans, etc., early in life can look forward to accumulating even larger nest eggs.  We simply wish that more young people understood these important facts of financial life.