Jonathan Clements | March 10, 2018

**STARTING TO SAVE** is a discouraging business. Even if you invest in stocks—and even if stocks post gains—progress initially can seem agonizingly slow.

Consider a simple example. Let’s say you earn $100,000 a year. Not exactly an everyday salary, I admit, but it makes the numbers easier to grasp. You save 12% of your income, equal to $12,000 each year. That money is invested at the start of the year and earns 6% annually, which is my expectation for long-run stock returns.

After three years, you’ve socked away $36,000 and collected three years of investment gains, and yet your account balance is just $40,500. That doesn’t exactly fuel your motivation.

Still, you persist—and in year 12 something interesting happens. By that juncture, you’ve socked away $144,000 and your year-end balance is somewhat below $215,000, which means you’ve now garnered almost $71,000 in investment gains. That’s not bad. Even more impressive: In year 12, for the first time, your investment gains—at $12,146—are marginally larger than the $12,000 you socked away.

You have reached the tipping point.

I first heard this moment described by investment advisor Charles Farrell, author of *Your Money Ratios*, and I’ve been fascinated by it ever since. Your portfolio is now hitting on both cylinders, thanks to significant contributions not only from your own regular savings, but also from investment gains. Thereafter, your nest egg’s growth is explosive: You go from less than $215,000 at the end of year 12 to $500,000 in year 21, $1 million in year 30 and almost $2 million in year 40.

To be sure, this happy story hinges on its assumptions. What if, instead of clocking 6% a year, the stock market nosedives? As long as you keep up your regular investment program—and as long as stocks eventually recover—this could boost your portfolio’s ultimate value, as you scoop up shares at bargain prices.

We also need to factor in inflation. My expected 6% long-run annual return is built, in part, on an assumed 2% inflation rate, so after-inflation stock returns are 4%. But if we have 2% inflation, that would likely boost your $100,000 salary by a similar amount each year, while also reducing the spending power of the nest egg you amass.

Let’s imagine your salary increases 2% annually—and so, too, does the nominal amount you save. After 40 years, you would have accumulated almost $2.6 million. But all those years of 2% inflation would slash the spending power of a dollar by 55%, so your portfolio’s value—in today’s dollars—would be worth somewhat under $1.2 million.

Getting an early start, and thereby enjoying a full 40 years of compounding, was crucial to hitting that $1.2 million. What if you had procrastinated for five years, so you only saved and invested for 35 years? Instead of $1.2 million, you would have ended up with a tad over $900,000, or 22% less.

As it happens, that $1.2 million is equal to 12 times your annual salary, which is often suggested as a goal for retirement savers. If you have 12 times your income saved by the time you retire, your portfolio should be able to generate retirement income equal to roughly half your annual salary, based on a 4% withdrawal rate. Add in Social Security, get your mortgage and other debts paid off by the time you quit the workforce, and you should be set for a comfortable retirement.

Nice work, right? And all it takes is a little perseverance—through those discouraging first dozen years.

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