On Monday, we we used our portfolio balance and our current savings rate to calculate the impact of different market conditions on our future portfolio. Today, we’re going to mix it up just a little bit. Same market scenarios. Different savings rate. Since Alaska is solidly in its own recession, we’re going to assume that Mr. T loses his job by the end of the year (Debbie Downer? I don’t actually think this will happen, but again, I love a good calculation scenario!), so instead of considering our current savings rate, we’re going to assume that we can only max out our Roth IRAs at a total of $11,000/year (or $916/month).

This scenario is more broadly applicable. You have $150,000 portfolio? You max out 2 Roth IRAs? This is the post for you! Again, to make these calculations, I use my very favorite compound interest calculator to plug in the numbers. We’re looking at 4 scenarios: from major recession to bonkers markets to see how long it would take to reach $1,000,000 and $2,000,000. Here we go:

The Recession Starts Tomorrow!

In this scenario, our entire portfolio takes a 25% hit before the end of the year and then grows at 3% forevermore. Let’s look at the numbers:

End of 2017: $112,500 – A 25% drop from today’s portfolio value.

End of 2018: $127,066 – $916/month savings, 3% return

End of 2019: $142,075– $916/month savings, 3% return

It would take us 3 whole years to recoup our original $150,000 saving only $916/month!

Based on continuing at that same savings rate ($916/month) with a solid 3% return, we would hit $1,000,000 by the end of 2052 ($1,000,337) – 3 years later than a 6% return with NO contributions at all! So, in this terrible financial scenario, we would have to max out our Roth IRAs for the next 35 years to even hit one million dollars! If we were going for $2,000,000 it would take a full 54 years! (2071!).

Bogle’s 4% Return Prediction

Jack Bogle is predicting a 4% return from the stock market for the next decade. Let’s say he’s right (to be clear, I don’t think ANYONE can predict the future of the markets), but the 4% return last forever. In this scenario, the market doesn’t take an initial nosedive (though I’m conservatively estimating our portfolio at the end of 2017 to remain at $150,000), but instead, returns 4% forever. In this scenario:

End of 2017: $150,000

End of 2018: $167,307 – $916/month savings, 4% return

End of 2019: $185,319 – $916/month savings, 4% return

Based on continuing at that same savings rate ($916/month) with a solid 4% return, we would hit $1,000,000 by the end of 2045 ($1,034,248) – 28 years away – We would hit $2,000,000 (again, considering we are maxing out Roth IRAs every single year for that long…) by the end of 2060!

Favorable Markets

Let’s go with 6% in this “good” market scenario. No big dip (though, again, for ease mainly, we’ll end 2017 with our current portfolio balance of $150,000.

End of 2017: $150,000

End of 2018: – $170,551 – $916/month savings, 6% return

End of 2019: – $192,369 – $916/month savings, 6% return

That extra 2% return shaves off a total of 6 years from the 4% scenario! At the end of 2039 (22 years), we would have $1,060,012. It would take another ten years of contributions to hit $2,000,000. By the end of 2049, we would have $2,078,696.

Bonkers Markets

Dave Ramsey says to count on a 12% market return. To be clear, I do NOT agree with him for your calculations, but for the experiment, let’s say HE’S the one that’s right (again, no one can predict the future of the market). With the same savings patterns, but a 12% return, the numbers look like this:

End of 2017: $150,000

End of 2018: – $200,730 – $916/month savings, 6% return

End of 2019: – $283,258 – $916/month savings, 6% return

Now the real question: Does TRIPLING market returns in my calculations cut the amount of time needed to work in half as one might hope? In this scenario is does! We would reach millionaire status in just 13 years ($1,049,257 by the end of 2030) and hit $2,000,000 in 19 years ($2,243,847 by the end of 2036).

Conclusions:

  • High Savings Rates Protect You From the Market – In our previous calculations with a higher savings rate ($4500/month instead of $916/month), the difference between the terrible markets and the bonkers markets was only 6 years. In this scenario, it’s a difference of 23 years!
  • Saving is the Only Control You Have – We can’t predict or control the markets. All we can do is save more and save early. The longer time in the market, the better off your investments are.

Bonus Scenario

Maxing out 2 Roth IRAs and 1 401k (or regular IRA) would be $29,000/year (or $2,416/month). Starting with $150,000 and considering all 4 scenarios again (plus a bonus bonus of an 8% return scenario!) adding in the maxed out 401k, let’s look at when we would hit $1,000,000 and $2,000,000:

Recession – $112,500 by the end of 2018, 3% return: $1,000,000 in 21 years (2038), $2,000,000 in 34 years (2051).

4% return with $150,000 beginning balance: $1,000,000 in 18 years (2035) and $2,000,000 in 29 years (2046).

6% return with $150,000 beginning balance: $1,000,000 in 15 years (2032) and $2,000,000 in 23 years (2040).

8% return with $150,000 beginning balance: $1,000,000 in 13 years (2030) and $2,000,000 in 20 years (2037).

12% return with $150,000 beginning balance: $1,000,000 in 10 years (2027) and $2,000,000 in 15 (2032).

How do your scenarios compare? Are you worried about the terrible market conditions possibility?