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Saturday, November 19, 2011

Average Joe's Retirement Fund

  • Assume: Joe has worked for 20 years at a company that matched  the company 401(k) by 50% up to 6% of salary. 
  • Joe contributed 6% of salary and being risk averse allocated his contribution and the company match to 50% bonds (aggregate exchange traded fund, AGG) and 50% stocks (S&P 500,SPY).
He was 45 years old when he started and today he is 65 years old. How much was his portfolio  worth at year end 2010?

Data sources: Average Joe made the average wage during his career. This data was obtained at . The market return data was taken from the "20 Year Periodic Table of Returns" produced by BlackRock. Here's the data and results:

CLICK TABLE TO ENLARGE The table shows that an average person, continually making the average wage over his peak earning years, at a company that offered  basic retirement benefits, accumulated $113,000 using an extremely conservative investment approach. This despite waiting until he was 45 years old before he saved a dime.

It is not easy to understand sometimes why people constantly complain.  Suffice it to say that the human race has not always had it so easy and that billions would trade places today with Joe in the blink of an eye. And they wouldn't be stuck at an average wage for 20 years.


  1. Fantastic example Robert! And since bonds have a very low correlation to stocks, Joe would've fared quite well even during the lost decade.

  2. This is looks not bad at all, to be perfectly honest.

    However, I have went through a similar exercise and published results with inflation & administration fees taken into account.

    Try to add moderate 2% for inflation and 1-2% for administrating the will not believe your eyes. It could be cheaper just to store them in precious metals or elsewhere. Could be very sobering experience, I am afraid.

    In my case, investing $40 K a year I will not be reach per-retirement level of income, even if I invest for 30+ years....see for yourself.

  3. Inflation doesn't come into my analysis because I just want to see how much they would have had at the end of the period. Of course 20 years ago one might have thought that $100,000 would have been enough to retire on and inflation makes that not so.
    In terms of administrative fees-many companies pay them. Management fees of course vary widely although more funds are beginning to use low cost etfs or allow self directed investing. You are exactly right that management fees will reduce the ending balance.
    The point of my exercise is that even starting very late, earning the average wage , and investing very conservatively it is possible to amass a nest egg considerably greater than the average 65 year old has today.
    I see a very valuable lesson in all of this for younger workers, especially as defined benefit plans become extinct.

  4. Defined benefit plans will become close to extinct for anyone in the private sector so we'd all better start saving and investing so we can take care of ourselves when we get older.

  5. We all want to enjoy a worry-free retirement. Early planning of our finances is important to achieve this goal. The average Joe should at least know the basics of investing. Making sound investment decisions is the key to making the most from our hard-earned money.