When the Worst Case Scenario Still Leaves You a Millionaire

Most investment writing focuses on optimization—how to get the greatest returns, how to outperform benchmarks and earn so-called alpha. And why not? Who doesn’t want beat the market? Who doesn’t want to win? However, many articulate and persuasive writers have pointed out that investing should focus less on winning and more on not screwing up.1 When such a strategy is followed, your short-term highs may not be as high (as those who take on greater risk), but your aggregate gains over the long-term will be enviable.

Of course, pursuing such a course is easier said than done. These investment models assume a type of patience and steadfastness that seem to largely ignore how most people behave. They assume you’re constantly employed and squirreling away money regularly into a defined contribution plan like a 401(k) or 403(b), that you’re maxing out your contribution and that your employer is generous in their matching benefit. These models assume that you’ll be getting historical returns; they assume you’ll be investing for 40+ years.

This is absurd. Very few people behave this way.2 Knowing this, I wanted to see what it would take to become a millionaire by saving wisely and investing prudently without making assumptions about optimization and maximization. I was surprised by how much one could underperform in terms of saving, timing, and returns and still walk away richer than most.

First, some context. There are an estimated 10.8 million American millionaires. This accounts for roughly 3.3% of the US population. Now, I’ll be the first to concede that a million dollars is not as much as one might think it is, but given how few people have attained that amount of wealth it’s as good a place to start as any. This coupled with the fact that the mean retirement account savings is less than $200K is a stark reminder that while $1 million isn’t a lot, it’s still more than five times the amount of savings the vast majority of people possess.

As mentioned, I believe too many savings and investment models assume that people are rational, well-behaved and begin saving in their 20s. I stripped away a lot of these notions and was happy to discover how well one could do. I found out that if someone…

  1. Didn’t have a cent saved until age 34 (and retired at 67),
  2. Never maxed out their 401(k) or 403(b) contributions to the total current annual allowance of $18,500,
  3. And never took advantage of “catch-up” contributions after the age of 50,
  4. Only realized annual net gains much lower than the normally touted 7%,
  5. And never took advantage of other potential savings and investment benefits likes a health savings account, IRA, etc.

…they could end up with than a million bucks in the bank. I crunched the numbers (essentially I toyed around with a compound interest calculator) and found that someone who started socking away $13,000 annually starting age 34 and earned “measly” 4.56% gross returns would still become a millionaire at age 67.3

Play around with the variables and they could be even wealthier. Perhaps, they might be able save more than $13,000 a year, or start saving at an earlier age (and/or retire at a later one), take advantage of “catch-up” contributions and so on. Point is, one doesn’t have to save and invest perfectly to become rich; you simply have to save and invest.


1For instance, Charles Ellis in Winning the Loser’s Game and William Bernstein in The Investor’s Manifesto. To quote Bernstein, “The name of the games is not to get rich, but rather to avoid dying poor.”

2Such poor behavior is often exemplified by lottery winners. For more, read Michael Batnick’s “The Limits of Data.”

3Note that these returns I calculated are not nominal and do not take into account the damaging effects of inflation. That being said, even with inflation, I think it’s fair to assume that most people would be better off with a million dollars than less than $200k. Additionally, this goal of a “measly” 4.56% gross returns squares with many finance bloggers’ estimates of future real returns  of 2-3%.

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