Investing: 2 men save same, end up $234K apart

Investing: 2 men save same, end up $234K apart

Out here in Exampleland, Pete and Frank always leave Philadelphia at noon and pass Helen and Irma in Altoona at 4:30, but no one will tell you how fast they're going. And when you're planning for retirement, you can always figure out what percentage of your income you can save, but no one here will tell you what you'll have when you leave the office for the last time.

Today we're going to show why, and what you can learn from that — because you can always learn something in Exampleland. We're going to start with Joe, who started saving for retirement at age 30 in 1975 and retired at age 65. Joe's younger brother, Ralph, also started saving at age 30, but does so four years later. You'll soon see why Joe hates Ralph, and it's not because Ralph briefly dated Abba's Agnetha Fältskog while visiting relatives in Sweden.

Joe invested all his retirement money in the Standard and Poor's 500-stock index and reinvested his dividends. So did Ralph. Each of them earned the median family income — half is higher, half lower. For Joe, that started at $11,800 in 1975, or $46,453, adjusted for inflation. For Ralph, who starts saving in 1979, that's $16,461, or $49,225 adjusted for inflation. Wage growth was a real thing in the 1970s.

Both Joe and Ralph saved 10% of their income each year for retirement. We use nominal dollars for our calculation — that is, not adjusted for inflation — because those are the kind of dollars you get deducted from your paycheck.

Why does Joe hate Ralph? Because Joe retired with $672,000 in his retirement account, while Ralph left work with $906,000 — a difference of $234,000.

As can only happen in Exampleland, both Joe and Ralph had identical savings plans, but they would end up with vastly different results. The reason was entirely due to accidents of birth. Joe retired at the end of 2009, shortly after the worst bear market since the Great Depression, while Ralph, who retired at the end of 2013, had time for his investments to recover and even grow larger.