Case Studies

Martin is a 35 year old project manager at Black & Veatch.   His salary is $140,000.  He will never get a raise.  He is going to start saving for retirement today.  He plans to save 10% of his paycheck, and work until age 65.  Martin is very risk averse, and believes the stock market is a casino.  He ignores the fact that stocks have averaged a nominal return of 8.4% since 1802 (Siegel, 2023).  He puts all of his savings into the stable value account, which earns 2.4% per year. 

Christina is a 35 year old assistant store manager at HyVee.  Her salary plus bonuses amount to $92,000 per year of income.  She will never get a raise.  She is going to start saving for retirement today.  She plans to save 10% of her paycheck, and work until age 65.  Christina has learned about the history of the stock market, and is an astute and disciplined investor.  She recognizes that inflation is her biggest enemy, not short-term market volatility, because she is young and has many years until retirement.  Christina puts all of her savings in a stock index fund, which earns 8.4% per year. 

Martin and Christina retire on the same day.  Their account balances are as follows: 

**Martin: $619,456

**Christina: $1,216,076 

Over the 30-year period, they had each contributed the following amounts: 

Martin: $420,000

Christina: $276,000 

Thus, over the 30 years, Christina had accumulated nearly double the amount of retirement savings while contributing $144,000 less of her own money.  She was able to spend that $144,000 on things she enjoyed doing, and generally consuming more goods and services.  Another way to look at this is that Martin had to set aside 68 cents for each dollar of retirement savings he had.  Christina only had to set aside roughly 23 cents for each dollar of retirement savings she had.  Simply put, Christina’s average dollar quadrupled itself, while Martin’s didn’t even double itself.  This is what we mean by making your money work for you. 

Now of course, the skeptics out there will say this is an unreasonable scenario.  Martin is highly compensated in a specialized field, while Christina does blue collar work.  Martin will not only get raises, but he will get them at a faster pace than Christina.  Okay, so let’s keep all the same facts from our example, but now let’s assume Martin’s salary increases by 5% per year, while Christina’s income only increases by 2.5% per year.  In other words, let’s assume Martin’s income growth rate is twice as fast as Christina’s.  Surely with this more realistic assumption we will see that Martin’s financial plan is superior.  Given this new scenario, let’s take a look at what the new retirement account balances will be: 

**Martin: $1,259,862

**Christina: $1,545,841 

Even with Martin’s income increasing at double the pace of Christina’s, his retirement savings is trailing by $285,979.  Moreover, let’s look how much each would have contributed to their savings: 

Martin: $611,237

Christina: $403,905 

And now, let’s look out our efficiency stats: 

Martin contributed $611,237 of $1,259,862 or 48 cents for every dollar he has

Christina contributed $403,905 of $1,545,841 or 26 cents for every dollar she has

 Any way you slice it or dice it, playing it too safe means you will be responsible to either save more, work longer, or some combination of both in order to reach your goals.  While the stock market can be very volatile in the short-run, in the long-run it has delivered remarkably consistent returns to the patient, disciplined investor.  Working with an experienced wealth advisor can not only provide access to perspective on the history of markets, but it also allows you to have a trusted voice when markets are in turmoil to help calm your nerves and keep you focused on your long-term plan.  Give us a call and let’s get started today.

*This is a case study to illustrate the benefits of a proper financial plan and sound financial principles.  The names and details used have been fictionalized, but are based on situations that financial planners work with clients on regularly. 

**All time value of money calculations assume money is contributed at the start of each year.  The decision to use beg/end mode is negligible in this illustration, the results would be similar in either case.  In real life, the contributions would typically be made on some regular interval basis corresponding to when the client gets paid.  For illustrative purposes, this would have made the calculations more complex and more difficult for the reader to understand.

Siegel, 2023 - Stocks for the Long Run, Sixth Edition, Professor Jeremy Siegel, Professor Emeritus, Wharton School of Business.