More earnings than contributions: your next retirement tipping point

I finally achieve the point in my retirement savings where I have more earnings than I do contributions, and I talk about what this means.

I started my first Roth IRA when I was two years out of college. At the time, I did have a job that offered a meager 401(k), but I realized that I needed to take as much control over my future finances as I could.

Initially, the ups and downs of the wider market were completely invisible to me. After all, when you have $1,000 in a Roth IRA, and the market goes down by 7%, who’s going to notice? Not me.

And for the longest time, as I reliably contributed the maximum I could each year in my baby Roth IRA, the wiggles of the market were minor and forgettable.

Over time as my balance increased, the wiggles became much more wiggly, and what felt like a straight line of balances became positively jumpy. When markets went down, I began to have the lived experience of that old saw I heard during the financial crisis that “my 401(k) became a 201(k).

But as I’ve noted before, if you’re invested in low cost, no load index funds, then over a 10 year period or longer, you’ve pretty much never lost money. So the balance kept growing.

And recently, I hit a new milestone on my retirement account, and I bring this up to show you why slow and steady wins the race.

A tipping point

Take a look at this graphic, and see what you notice.

The blue parts are contributions, while the green parts are the investment returns. These charts stack on top of each other, as opposed to being one in front of the other, so if the blue area stays constant but the amount of green increases, the blue part will move higher.

And that’s exactly what we’re seeing in this, my contributions and returns from the past year and a half or so. My contributions were minimal during this time (blue), so the height of the blue stayed more or less constant, while the returns (green), after dipping a bit, skyrocketed.

That’s exciting enough, but it isn’t the most exciting part.

Because look at this point in time:

Look at the height of the blue versus the green. Notice how after this point, the green is now taller than the blue.

This is the point where, for the first time in my life, my total investment returns have become larger than my total contributions.

How did that happen?

It wasn’t that long ago that I started investing from $0. And I was writing this blog when I had achieved my first “elite status” at Vanguard.

But that was, by and large, based on contributions alone.

Now, by contrast, the bulk of this investment account is returns, or earnings, not contributions.

What does that mean?

Well, qualitatively, it’s evidence of a tipping point in my investment plan.

My returns will likely from now on be growing faster than my contributions, unless the market crashes spectacularly, and even then it will recover eventually. (Remember when we thought the pandemic would be bad for the stock market?)

It doesn’t mean I’m wealthy, or have achieved financial freedom or anything like it. But in it own way, it shows how such an outcome is possible.

Compound interest is an amazing thing. It starts small, but it grows and grows and grows and doesn’t stop, until you have something much larger than you could possibly have built on your own.

And so, looking beyond this particular milestone, there is one even larger: When your money grows faster than you can even spend it.

And I call that “retirement achieved”.

How can you achieve this milestone?

Do you want in on this? I bet you do.

Perhaps you’re at the beginning of your journey: not much money, almost no returns.

Everyone has to start there, but that not where you’ll end up. Because if you contribute to a retirement account, even with small amounts, year after year, eventually, you’ll be in the same position, where your returns will be greater than your contributions.

Remember that, given the Rule of 72, $1 after 10 years becomes $2. Meaning that $1,000 after 10 years becomes $2,000, and $10,000 becomes $20,000.

Are you not sure if you’re in a place to start investing? Well, I have some thoughts on that, but if you’d like, we can figure that out together.

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