A river cutting through sedimentary rocks throughout millennia can create something mind-blowing like the Grand Canyon. Just like the Grand Canyon wasn’t created overnight, your investments need consistent contributions and decades of appreciation to build generational wealth. Too often, we invest for a couple of years into a 401(k) or IRA thinking our few thousand-dollar investments should be a hundred-thousand dollars. And when that isn’t the case, we give up contributing altogether.
I wanted to write a post detailing how powerful making consistent contributions and having a multiple decade investment horizon viewpoint can be to your wealth. This idea is especially important for Millennials and Gen Z. I was curious to see what one’s IRA account would be worth had they done the following:
1. Invest the maximum allowable contribution to their IRA each year.
2. Invested those funds in full at the beginning of the year to receive the full year’s investment gains/losses.
3. Invested those funds in an index that tracked the S&P 500.
4. Reinvested dividends received from that index back into the invested index.
The Individual Retirement Account was created in 1974. The maximum contribution one could make to their IRA was $1,500. That’s equal to about $7,812 in 2019 dollars. The next increase in contributions happened in 1982 when it was increased to $2,000. In 2019, the maximum an individual can contribute to an IRA is $6,000. Between 1974 and today, there have been added provisions such as the Roth IRA, which allows contributions to grow tax-free and qualified distributions at retirement are tax-free as well. There are also catch-up contributions, where someone older than the age of 50 can contribute above the maximum contribution. There are also stipulations on who can contribute to IRA accounts based on if they are covered by a retirement account at work as well as income thresholds. For this article, I am assuming catch-up contributions are not being made and the person who made the contributions qualifies to make the maximum contribution each year.
This graph shows from 1974 to 2018 what one’s total contributions equaled and what the total investment account grew to. Over 45 years, $131,000 in contributions would have grown to $1,862,400 – and that’s with the S&P 500 decreasing -4.38% in 2018!
The next chart shows exactly what the contributions totaled, the S&P 500 return for that year, and what the year-end invested balance would have been. This certainly is not a “get rich quick” endeavor; but, with a multi-decade outlook and the consistency of making contributions every year (even in the down years), you can see how generational wealth is built.
And finally, this graph below is the first graph but with the yearly stock market gains/losses overlaid so you can see the impact in the grand scheme of things. While a market decline of -20% or more is an event that will cause much stress, you can see how long it takes for the market to recover - quicker than you would think. And even while a market decline of -4.38% in 2018 gave people much to fret about, the impact it had in the overall picture of this portfolio was minimal. Market declines are a blip on the radar when you are taking a multi-decade outlook for building generational wealth. If anything, the savvy investor realizes declines in the stock market as an incredible buying opportunity when they have the multi-decade mindset. In these 45 years, there were 9 years where the market was negative. 4 out of 5 years are positive, but it seems all we hear about are the 1 year in 5 that are negative.
Much like water chiseling away at the sedimentary rock, time is our friend when it comes to investments. When markets are positive 36 times out of 45, it’s easy to see how one can turn $131,000 into nearly $2,000,000. If you are a Millennial like myself (or a member of Gen Z), time is the greatest asset we have at our disposal – it would be a shame to let that go to waste.
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About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.