People don’t realize what a huge impact it has when we add investment returns to our savings over a lifetime, or how important it is to keep the investment effort going after retirement. In this post we’ll look at some numbers and come up with a simple rule of thumb.
We know that it’s not unreasonable to expect a higher return (the socalled “risk premium”) if we take higher risk. In this post I want to give you a rough idea of how much our lifetime savings can be multiplied if the risk premium that we hope for, comes through.
From our book The Retirement Plan Solution published some years ago, we three coauthors found out that the most memorable takeaway was what we called the 103060 rule. Based on assumptions that seemed reasonable before the global financial crisis, we estimated that, if an individual saved over a lifetime (specifically, from age 25 to 65) and gradually drew down the pension pot in retirement (specifically, from age 65 to 90), roughly 10 cents of every dollar of postretirement withdrawals came from money that was saved each year, roughly 30 cents came from investment returns in the preretirement accumulation period, and roughly 60 cents came from investment returns in the postretirement decumulation period.
Let’s be explicit about interpreting two aspects of that result.
The first is that, if 10 cents saved ultimately creates a dollar of withdrawals, overall that’s a multiplier effect that gives the original savings 10 times as much power by investing them.
The second is that the aggregate investment return after retirement contributes twice as much as the aggregate return before retirement: 60 cents versus 30 cents.
No wonder people found those conclusions memorable!
Of course it’s possible to quibble about every one of our inputs. You wouldn’t expect to earn the same return today, with governments deliberately holding down interest rates. You wouldn’t take as much investment risk in the drawdown period as you might in the accumulation period. Who knows what the individual’s pay path would look like? Or life expectancy. True, true, true, true.
So there’s a simple challenge to any critic. Put in your own assumptions. If you redo the calculations, two conclusions will still emerge:
 Investment returns create a huge lifetime multiplier effect on the amounts actually set aside as retirement savings. (It doesn’t matter whether or not the multiplier is 10.)
 A large proportion of the overall investment return actually accrues after retirement. (It doesn’t matter whether or not it’s twice as large as the amount that accrues before retirement.)
You may think the investment job is done once you retire. It isn’t. There’s probably at least as much to be done after retirement as there was before.
Just for fun, the table below shows the numbers (underlying 103060, that is), based on a first year contribution of 1,000, and aggregated into 5year periods.
Notice how:
 The contributions grow gradually, as the pay increases gradually.
 The investment return starts off small. It takes more than 10 years before the returns exceed the contributions.
 But after that the investment returns accelerate noticeably. This is often called “the magic of compound interest.”
 After retirement, withdrawals start.
 Even after withdrawals start, the investment return on the remaining assets is large for a long time. That’s because the assets remaining stay large. This is why the aggregate postretirement investment return is so big – and so important.
The Multiplier Effect
Participant’s Age at Start of Year  Accumulated Assets at Start of 5Year Period  Total 5Year Contributions Made (increasing at 4.75% a year)  Total 5Year Withdrawals (increasing at 3% a year)  Total 5Year Investment Return (at 7.5% a year)

Accumu lated Assets at End of 5Year Period 
2529  0  5,498  1,084  6,582  
3034  6,582  6,934  4,234  17,750  
3539  17,750  8,745  9,458  35,953  
4044  35,953  11,029  17,838  64,820  
4549  64,820  13,910  30,979  109,709  
5054  109,709  17,541  51,251  178,501  
5559  178,501  22,123  82,121  282,745  
6064  282,745  27,900  128,672  439,317  
6569  439,317  154,057  160,550  445,810  
7074  445,810  178,594  158,470  425,686  
7579  425,686  207,040  144,010  362,656  
8084  362,656  240,015  109,956  232,597  
8589  232,597  278,244  45,647  0  
TOTAL  0  113,680  1,057,950  944,270  0 
By the end, of the 1,057,950 withdrawn, only 113,680 (between 10% and 11%) came from contributions and 944,270 (between 89% and 90%) came from investment returns. If you do the addition, of the investment returns 325,637 (just under 31% of the withdrawals) accrued before retirement and 618,633 (a bit more than 58% of the withdrawals) accrued after retirement.
To remember it conveniently, we called it 103060.
The main lesson is simple. The investment job is less than half done at retirement.
***
Takeaway
Over time, investment returns multiply our savings enormously. And much of that effect takes place after retirement, so continuing to focus on our investments after retirement is vital.
6 Comments
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (coauthored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.
I loved the clarity and simplicity with which major points have been made.
The 103060 summary is a true Gem.
The biggest message for me is that at retirement, only half our work is done.
For me, this is not an Oh No moment, but an Aha moment.
The Aha has two dimensions to it.
The first is that, even if I was somewhat remiss in my past financial management, I know that the door is not closed and yes, it is still open. The second is that it is therefore not to late to regroup and take future (note: starting now) financial planning seriously. There is wisdom in the age old saying: “Hope springs eternally”
Thanks, I’m glad you saw through my verbosity and got the message! Focusing on the second conclusion is particularly practical, because it relates to the future, as you say, regardless of the past.
Don
This rule provides a great reminder about the benefit of long term investing but your numbers aren’t realistic. It is not a 10:1 ratio of benefits to contribution. That number is just a money illusion.
When comparing spending or income over long time periods, you need to adjust for inflation. It makes no sense to compare the $10 that an 85 yearold spends now with the $1 that a 25yearold gave up in 1957 when average wages were only $100 a month.
The power comes from the compounding but I don’t know anyone who thinks a stable return of CPI+7.5% is possible over any time frame.
If you run the numbers in real terms (using CPI) you will find the ratio is more like 2:3:4. The returns at the end are still important, but if you don’t have the savings to contribute at the start, there will be little capital to earn any return on.
Thanks for your spirited comments! I’m with you part of the way, but not quite all the way.
(1) You’re absolutely right, there’s a money illusion, because everything is quoted in nominal terms rather than in real (afterinflation) terms. (And I think I’ll have to write a post explaining the difference. I’ll note that for the future.) It’s only afterinflation numbers that matter, because they reflect purchasing power, and that’s the goal: to generate postretirement purchasing power.
(2) There’s still, as you say, power from compounding, and that’s the point I wanted to make. You’ll note that I drew attention to the multiplier effect, regardless of its size.
(3) I never referred to a real annual return of 7.5%, so I won’t respond to that point. It was a nominal return I used. And in the years before the global financial crisis, 7.5% nominal was far from an unusual assumption. Think of 3% inflation, 23% in government fixed income yields, and the equity risk premium. In fact, the mean US S&P 500 real annual return between 1928 and 2015 was 8.2%. So, while those assumptions seem unrealistic (I suggested so in the post) after almost 10 years of financial repression, there was a time when they were middleoftheroad assumptions, and that’s when we used them.
(4) I challenged critics to run their own numbers. You did so — bravo! You don’t say what your input assumptions were, but that doesn’t matter to me. You’ve provided two implicit conclusions in your 2:3:4 result. (a) In real terms, you find a multiplier of 3.5. (b) You find that, in real terms, more of the investment contribution comes after retirement than before. I’m happy to have readers accept both of those conclusions.
(5) I really like your final sentence. Yes, saving is itself the base, and therefore the most important aspect. With zero savings, it doesn’t matter what the multiplier is, the available assets are zero.
Again, thanks for your comments! They’re substantial, and contribute greatly to the discussion. Please keep your pen poised as you read future posts!
Hi Don
Thanks for your detailed reply.
Just to clarify a couple of points around (3) and (4). I realise that your 7.5% is nominal, but if the 7.5% was real the numbers would be the 10:1. I agree that 7.5% nominal return is higher than what I would assume now, but it was not unreasonable.
I have run many different numbers testing out the ratio and the 2:3:4 comes when real returns are around 5%, ie consistent with your 7.5% nominal assumption
If the returns are lower, say 3.5% real (which would be a great riskfree rate today) the ratio changes dramatically. In that world (with 1% real wages growth), the segments are broadly equal (1:1:1). This happens to correspond with the long run net returns in the Australian superannuation system (since 1992). My linked article details these numbers a little more.
Thanks for your further comments. Thanks also for your very clear article, the link to which didn’t make it into the way your comment appears, so I’ll try to reproduce it here: cuffelinks.com.au/103060nolongerrule. For the general reader, I’ll still emphasize that your numbers make even clearer the fact that, with little investment risk, there’s little multiplier effect, so my scary point in Post #17 is confirmed; and any way you look at it, the postretirement phase is still extremely important as far as investment return is concerned.