- Amy’s savings start from $0 and grow to $100,000 in the first ten years. Her cumulative savings don’t grow after that. However, her investments continue to grow.
- Amy’s investment income is relatively modest in the first ten years. Whereas she saves $100,000, her investment income adds up to a total of $44,866 over ten years. Compare this with the last year of her career, when in that one year alone her investment income is $54,017, more than she earns in the first ten years put together.
- Bob saves nothing, and consequently has no investment income in the first ten years. His net worth is zero until year 10. From years 11 through 20, his wealth grows exactly as Amy’s grew in years 1 though 10. But then there is a departure. Bob continues to save, whereas Amy stopped saving after the first 10 years.
Sadly for Bob, he still falls short despite saving for twice as many years. Saving is hard. It involves sacrifice. Why does Bob fall short? This question can be largely answered by looking at year 11. In year 11, Bob saves $10,000. Amy saves nothing. But Amy’s investments earn $12,516. Amy’s investments are growing faster than Bob can save! Amy had a huge head start. Even though her investment income seemed small in the first 10 years, the total pile of savings and investments she built in those early years was enough to outpace Bob. In year 30, Bob’s investment income is $36,610, which isn’t small, but it is well short of the $54,017 Amy’s investments earn that year. For savers, investment income becomes sizeable as they approach retirement, as it should be. After all, in retirement, people expect to be able to live off of their investment income without reducing their net worth very much. After all, who knows how long we are to live.