The formula for retirement success

In our retirement workshops, we often look at the components of retirement savings as a simple mathematical formula:

I know the actual math is different (P(1+i)^t)=FV but the point is that your retirement assets are really a function of some key components.

What is the most important?

Recently, one of the participants in one of my workshops asked which variable or component is most important. My initial gut instinct was to do some math.

Lets say you have $100 per month to invest (Savings) and we assume a 5% rate of return (Return) over a 20 year period. The result is $40,580 of future value. Let’s then adjust each variable by 10% and see what the results look like:
  • Savings –$110 x 5% x 20 years = $44,638
  • Return – $100 x 5.5% x 20 years = $42,887
  • Time – $100 x 5% x 22 years = $47,256

What are the takeaways from this?

When you look at these results, you might see some simple observations:

  1. Rate of return is the sexiest variable but maybe the least important over shorter periods of time. In this example, a 10% increase in return had the lowest impact on results over a 20-year time horizon.
  2. Rate of return can have a greater impact over longer periods of time because of the math of compound interest but it is also the variable you have the least control over. It is impossible to know what markets, interest rates, economies, etc. will do looking ahead into the future. What I find interesting is the investment industry has been built on a platform of guesswork, predictions, and forecasting. Everyone is trying to outguess and out predict each other and yet it’s the least effective strategy in improving returns. That being said, return leaks over long periods of time can have a significant impact on the future value of your retirement assets. An example of return leaks is high Management Expense Ratios (MER).
  3. Time has the greatest impact but unfortunately, too many people are impatient. Everyone I meet wants to retire sooner than later. We are all trying to achieve financial freedom as quickly as possible and the dream is that high returns will help us get there faster.
  4. Since time is so important it goes to highlight that the biggest risk and the biggest cost to your future value is PROCRASTINATION. Start saving early. The sooner the better. Don’t wait.
  5. If you are results-oriented and you want to have the greatest impact on your future nest egg, it is critical that you focus on what you can control and not what you can’t control. The simplest variable that will impact your financial future is your savings rate. Make it automatic, make it simple, increase your savings.

A final thought

Although I think I’m pretty good at math, I reached out to a math guru and fellow personal finance blogger, Micheal James. His comment really puts all this math in perspective:

“My take on this is that the question of whether savings, return, or time is most important is like asking which is most important, your brain, heart, or lungs. You need them all. If you don’t save anything, you’ll end up with nothing. If you lose 50% every year on penny stocks, you’ll end up with next to nothing. If you save for less than one year, you’ll end up with little. Getting any of the three elements wrong can derail your retirement. The good news is you don’t have to shoot for the moon; just be reasonable in all three areas and you’ll get good results.”

What are your thoughts on the formula for retirement success?


  1. Michael James

    Hi Jim,

    I must have been having a good day when I wrote that quote. Thanks for the mention.



  2. Rob


    good framework here. The discussion can now go in so many ways. “What do you do if you didn’t start early enough”? “Is it fair or wise to play with Return as a variable”?
    If there is a shortfall, as we are seeing in for many of the Boomers, doesn’t financial planning have to come up with news answers other than “working longer”?
    Can I use my Cash Flow in different ways to make up for a shortfall in the variables?


  3. Scott Powell

    Hi Jim,
    Great article! Nice and simple and to the point! Shered the hell out of it.


  4. Bob

    I’m in agreement with you all the way but I would add the importance of having cash at hand so you can buy on the dips. Though you cannot time the market you can watch the business channel or read a newspaper and see the markets have fallen…then deploy the cash. If you’re waiting for the bottom, you will miss it. Monthly contributions will only have you buying high most months.

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