When talking about retirement investing, there is often a lot of conjecture and opinions. People come up with many scenarios and investment strategies. Projections into the future are tricky. However, looking into the past is easier. So, instead of discussion whether a 12% average stock market return is realistic, we can look at actual stock market returns from the past. Instead of considering whether a $50,000 income is realistic, we can look at incomes from the past.
Here is what we are going to consider today. We are going to consider a man named Average Joe. Average Joe was born in 1953. Average Joe started work at age 21. Average Joe always made the median income for his age bracket – so, he was a mid-level earner. Half the country earned more than him. The other half earned less. Average Joe contributed 15% of his income to his retirement account. Average Joe invested his entire retirement in an S&P 500 Index fund. It’s 2018 so Average Joe is now 65 years old. What follows will be a table of what would have happened to Joe’s retirement account balance.
| Year | Age | Median income | Retirement contribution | S&P 500 return rate | Growth from previous year | New balance | Notes |
|---|---|---|---|---|---|---|---|
| 1974 | 21 | $2,713.00 | $406.95 | -25.90% | 0 | $406.95 | |
| 1975 | 22 | $2,846.00 | $426.90 | 37.00% | -$105.40 | $728.45 | |
| 1976 | 23 | $2,971.00 | $445.65 | 23.83% | $269.53 | $1,443.63 | |
| 1977 | 24 | $3,237.00 | $485.55 | -6.98% | $344.02 | $2,273.19 | |
| 1978 | 25 | $13,410.00 | $2,011.50 | 6.51% | -$158.67 | $4,126.02 | Age bracket jump |
| 1979 | 26 | $14,672.00 | $2,200.80 | 18.52% | $268.60 | $6,595.43 | |
| 1980 | 27 | $15,580.00 | $2,337.00 | 31.74% | $1,221.47 | $10,153.90 | |
| 1981 | 28 | $16,092.00 | $2,413.80 | -4.70% | $3,222.85 | $15,790.55 | |
| 1982 | 29 | $16,416.00 | $2,462.40 | 20.42% | -$742.16 | $17,510.79 | |
| 1983 | 30 | $16,805.00 | $2,520.75 | 22.34% | $3,575.70 | $23,607.25 | |
| 1984 | 31 | $18,093.00 | $2,713.95 | 6.15% | $5,273.86 | $31,595.06 | |
| 1985 | 32 | $18,662.00 | $2,799.30 | 31.24% | $1,943.10 | $36,337.45 | |
| 1986 | 33 | $19,162.00 | $2,874.30 | 18.49% | $11,351.82 | $50,563.57 | |
| 1987 | 34 | $19,927.00 | $2,989.05 | 5.81% | $9,349.20 | $62,901.83 | |
| 1988 | 35 | $28,545.00 | $4,281.75 | 16.54% | $3,654.60 | $70,838.17 | Age bracket jump |
| 1989 | 36 | $29,437.00 | $4,415.55 | 31.48% | $11,716.63 | $86,970.36 | |
| 1990 | 37 | $29,773.00 | $4,465.95 | -3.06% | $27,378.27 | $118,814.58 | First time over $100K |
| 1991 | 38 | $29,301.00 | $4,395.15 | 30.23% | -$3,635.73 | $119,574.00 | |
| 1992 | 39 | $29,491.00 | $4,423.65 | 7.49% | $36,147.22 | $160,144.87 | |
| 1993 | 40 | $30,342.00 | $4,551.30 | 9.97% | $11,994.85 | $176,691.02 | |
| 1994 | 41 | $30,707.00 | $4,606.05 | 1.33% | $17,616.09 | $198,913.17 | |
| 1995 | 42 | $31,420.00 | $4,713.00 | 37.20% | $2,645.55 | $206,271.71 | First time over $200K |
| 1996 | 43 | $32,167.00 | $4,825.05 | 22.68% | $76,733.08 | $287,829.84 | |
| 1997 | 44 | $32,851.00 | $4,927.65 | 33.10% | $65,279.81 | $358,037.30 | |
| 1998 | 45 | $38,922.00 | $5,838.30 | 28.34% | $118,510.34 | $482,385.94 | Age bracket jump |
| 1999 | 46 | $40,804.00 | $6,120.60 | 20.89% | $136,708.18 | $625,214.72 | |
| 2000 | 47 | $41,039.00 | $6,155.85 | -9.03% | $130,607.35 | $761,977.92 | |
| 2001 | 48 | $41,104.00 | $6,165.60 | -11.85% | -$68,806.61 | $699,336.91 | |
| 2002 | 49 | $40,969.00 | $6,145.35 | -21.97% | -$82,871.42 | $622,610.84 | |
| 2003 | 50 | $42,079.00 | $6,311.85 | 28.36% | -$136,787.60 | $492,135.09 | |
| 2004 | 51 | $41,865.00 | $6,279.75 | 10.74% | $139,569.51 | $637,984.35 | |
| 2005 | 52 | $43,627.00 | $6,544.05 | 4.83% | $68,519.52 | $713,047.92 | |
| 2006 | 53 | $45,693.00 | $6,853.95 | 15.61% | $34,440.21 | $754,342.08 | |
| 2007 | 54 | $42,129.00 | $6,319.35 | 5.48% | $117,752.80 | $878,414.23 | |
| 2008 | 55 | $41,757.00 | $6,263.55 | -36.55% | $48,137.10 | $932,814.88 | Age bracket jump |
| 2009 | 56 | $41,296.00 | $6,194.40 | 25.94% | -$340,943.84 | $598,065.44 | |
| 2010 | 57 | $41,242.00 | $6,186.30 | 14.82% | $155,138.18 | $759,389.92 | |
| 2011 | 58 | $41,550.00 | $6,232.50 | 2.10% | $112,541.59 | $878,164.00 | |
| 2012 | 59 | $42,176.00 | $6,326.40 | 15.89% | $18,441.44 | $902,931.85 | |
| 2013 | 60 | $41,915.00 | $6,287.25 | 32.15% | $143,475.87 | $1,052,694.97 | Millionaire! |
| 2014 | 61 | $43,280.00 | $6,492.00 | 13.52% | $338,441.43 | $1,397,628.40 | |
| 2015 | 62 | $46,698.00 | $7,004.70 | 1.36% | $188,959.36 | $1,593,592.46 | |
| 2016 | 63 | $47,001.00 | $7,050.15 | 12.25% | $21,672.86 | $1,622,315.47 | |
| 2017 | 64 | $47,001.00 | $7,050.15 | 21.14% | $198,733.64 | $1,828,099.26 | No current data, taking previous year’s income |
| 2018 | 65 | $47,001.00 | $7,050.15 | $386,460.18 | $2,221,609.60 | No current data, taking previous year’s income |
Joe has now retired and has a $2.2 million in his account. Over Joe’s investing lifetime, the S&P500 averaged 11%. If the S&P500 returns an average of just 6% in retirement – much worse than during his working lifetime – Joe can take out $132,000 each year and never touch his $2.2 million, which he can leave to the next generation. (And note that his retirement income is more than two and a half times his working income. Nice!)
Don’t believe the numbers? Here are the sources:
Average income by age bracket: https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-people.html – I used the table “Age—People by Median Income and Sex”, took the all races model, and looked at men. (The women figured would have been skewed downward by the higher rate of part time work among women. The current gender pay gap has women earning about 80% of what men earn for full time work. However, looking at the table shows that the median female income is about 63% of what men earn. So, if you were to do this for full-time working women, you could pessimistically multiply the results by 60% and get about $1.32 million. And no matter what you multiply it by, the retirement income is still 2.5 times the working life income.) The age brackets are 15-24, 25-34, 35-44, 45- 54, and 55-64. Wage data ended in 2016, so I copied and pasted the wage for 2017 and 2018. In 2018 I took data from the 55-64 age range, since the 65+ age range was skewed downward because many people in that range are no longer working.
Average S&P500 return: https://seekingalpha.com/instablog/605212-robert-allan-schwartz/4831186-annual-returns-s-and-p-500-1928-2015 (here’s the source for 2016 and 2017)