The Tale of Retirement Savings: $417 to $2.8 million

Your retirement savings has potential to grow from $417 to $2.8 million over 40 years with consistent investing from every paycheck! Yes, it is possible! How? Read on! 

After you decide how much to contribute in a 401(k) and/or Roth IRA, it’s time to decide where to invest your retirement savings starting from your first paycheck.

You will have more flexibility with a Roth IRA because it is a self-directed retirement account. For instance, you get to choose your brokerage firm and your investments. In addition, you will have more control over the investment cost. In comparison, as 401(k) is offered by an employer, you will have no control over the investment choices or investment cost. Most employer’s 401(k) plans offer funds in the following generic categories for you to choose.

  • Guaranteed Income Fund or Stable Value – similar to money market fund
  • Fixed Income – Inflation Protected Bond, Intermediate Bond, High Yield Bond
  • US Large Cap – Value, Blend or Growth
  • US Mid Cap Cap – Value, Blend or Growth
  • US Small Cap – Value, Blend or Growth
  • International Large Cap – Value, Blend, Growth
  • International – Emerging Market
  • Domestic Real Estate
  • Target-Date Retirement Fund

I know, so many choices. It may be overwhelming to research mutual funds in each category. So which ones should you choose? 

The tale of two approaches: Retirement Savings

I recommend two approaches, either build your own three fund portfolio or use a target-date retirement fund. I prefer building my own portfolio, because it gives me more control; however, you may decide to use a target-date retirement fund. With consistent investing, either a three fund portfolio or one fund portfolio will help you build your retirement nest egg. In the following paragraphs we will review each approach in more detail, starting with a three-fund portfolio.

Build your own retirement portfolio:

If you chose to build your own three fund portfolio, I recommend keeping it simple by diversifying amongst the three asset classes below because it would provide broad diversification across domestic and international markets.

  • US large cap blend; example: Total Stock Market Index Fund or S&P 500 Index Fund
  • International Large Blend; example: Total International Index Fund
  • Fixed Income; example: Total Bond Market Index Fund 

So now you get to decide the percentage of your savings in each category. For instance, in your 20s, or if you are an aggressive investor, I recommend 60% to 80% in the US large cap blend fund, 20% to 40% in the international large cap blend fund, and 10% to 20% in the total bond market index fund. Ultimately, you should choose your allocation according to your risk tolerance

I recommend investing in index funds, if you have that choice available, in a 401(k) plan because index funds offer broad diversification. For example, the Vanguard Total Stock Market Index Fund tracks the US Total Market Index, thus providing investors with exposure to the entire U.S. equity market. In addition, index funds are low cost compared to actively managed mutual funds.

Simplify by investing your retirement savings in one fund

If you want to keep it even more simple, invest in just one fund, the Target-Date Retirement Fund! That’s it! The target-date retirement fund offers a diversified portfolio within a single fund. In addition, the fund automatically decreases equity exposure and increases fixed-income exposure as the target retirement date approaches, depending on your investment time horizon, For instance, most target date retirement funds with a 30 to 40 year investment time horizon consist of approximately 90% stock and 10% bond at the beginning and gradually decrease equity exposure.

Walk through Jo’s Retirement Savings

Remember Jo, our young professional from the How to invest your savings from your first paycheck post? Jo decided to invest 20% of her $50,000 salary between a 401(k) and Roth IRA. In addition, Jo’s employer matches 100% of her contribution up to 6% of her salary. Let’s recall Jo’s contribution to 401(k) and Roth IRA.

  • 401(k) contribution =$4,000 / year ($3,000 up to the employer’s matching contribution + $1,000 balance, left over after Roth IRA contribution)
  • Roth IRA contribution = $6,000 / year (maximum allowed in 2020)
  • Employer matching contribution to 401(k) = $3,000 / year (100% match up to 6% of salary)
  • Total Investment Amount = $13,000 / year

Assuming Jo is getting paid twice a month and decided to contribute same amount from each paycheck, her contributions per paycheck to retirement savings accounts would be as follows:

  • 401(k) contribution = $166.67 ($4,000 / 24 paychecks)
  • Roth IRA = $250 ($6,000 / 24 paychecks)
  • Total contribution from each paycheck = $416.67


  • 401(k) employer match per paycheck = $125 ($3000 / 24 paychecks)

Jo’s Risk Tolerance:

Jo decided that she is comfortable with 90% equity / 10% bond allocation based on her risk tolerance. Jo also wants to build her own three fund portfolio. Let’s walk through her portfolio from the first paycheck.

Jo’s Three Fund Portfolio:

Jo decided to allocate among three broadly diversified index funds as follows:

  • US Large Cap Blend Index Fund: 60%
  • International Large Blend Index Fund: 30%
  • Total Bond Market Index Fund: 10%

Here is how her three fund portfolio would look like from the first paycheck. 

Three Fund Portfolio – From first paycheck401(k)Employer MatchRoth IRATotal%
US large cap blend index fund$100.00$75.00$150.00$325.0060%
International large cap blend index fund$50.00$37.50$75.00$162.5030%
Total Bond Market Index Fund$16.67$12.50$25.00$54.1710%

Of course, as Jo grows older, she should consider reducing equity exposure as her investment time horizon shrinks to lower the portfolio risk. The common guidelines from mutual fund companies suggest 120 minus your age or 100 minus your age as your stock allocation. For instance. she may decide to move from her current allocation of 90% stock / 10% bond, to 70% stock / 30% bond in her 40s, to 60% stock / 40% bond in her 60s. 

What if Jo does not want to deal with adjusting allocation overtime and wants to pick just one fund and be done with it? Nothing wrong with that choice either. So let’s look at Jo’s retirement account with Target Date Retirement Fund.

Jo’s Target Date Retirement Fund:

If Jo decides to invest in a target date retirement fund for 2060 (40 years investment time horizon from 2020) instead of a three fund portfolio, here is how her portfolio would look from her first paycheck. 

From first paycheck401(k)Employer MatchRoth IRATotal%
Target date retirement Fund 2060$166.67$125$225$541.67100%

One fund, that’ it! Although, target date retirement funds consist of three of four underlying funds diversified among US equity, international equity and bond funds. For example, Vanguard Target Date Retirement Fund 2060 consists of following four funds. 

  • Vanguard Total Stock Market Index Fund: 54.20%
  • Vanguard Total International Stock Index Fund: 36.20%
  • Vanguard Total Bond Market Index Fund:   6.90%
  • Vanguard Total International Bond Index Fund:   2.70%

Notice that the equity / bond allocation of the 2060 target date retirement fund (90% equity / 10% bond) is almost the same as Jo’s three fund portfolio due to a longer investment time horizon. Although, the target date retirement fund’s allocation would automatically become more conservative over time.

Jo may choose to invest in three funds portfolio in Roth IRA and target target date retirement fund in her 401(k) or vice-a-versa. Either the three fund portfolio and/or the target date retirement fund portfolio has the potential to make Jo a millionaire!

Retirement Savings: $417 to $2.8 million!

I know, when you look at the invested amount in Jo’s retirement accounts from the first paycheck, it may not look like it is much! But with consistent investing from every paycheck, generous matching from her employer, and compounding interest, Jo’s retirement account would grow from $417 to almost 2.8 million dollars after 40 years (assuming she is increasing the contribution at average inflation of 2% and her investment grows at an annualized rate of return of 6%). Here is how Jo’s retirement accounts balance would look after 40 years. 

AccountPrincipal AmountCompoundingValue of Investment
401(k) Contribution – Jo’s$241,608$641,626$856,234
401(k) Contribution – Employer Match$181,206$460,969$642,175
Roth IRA – Jo’s$362,412$921,939$1,284,351
Total $785,226$1,997,534$2,782,760


You can make investing more complicated than it should be by making it “sophisticated” using value investing or factor investing or sector investing. Sure you can add other investment categories such as real estate, precious metals, bitcoins (strongly discouraged) in your portfolio. However, that’s not necessary. I would keep it simple at the beginning. As you progress in your journey in building your wealth, consider adding real estate or other asset classes without deviating from your overall financial policy statement.

The three fund approach and the target date retirement fund approach are not exciting, but they are simple yet effective. However, at times, it is challenging to implement a simple strategy.

Once you decide your investment choice, stick with it over a long period of time and let the  discipline of consistent investing and compounding interest build your wealth. 

Book Recommendations

The following two books guided me during my initial learning stage of investment. Hope it provides you some guidance as well.

The Bogleheads’ Guide to Investing by Lorimor, Lindauer and LeBoeuf. This book is for anyone who wants to learn how to invest money on your own (Do-It-Yourself, DIY investors). The book provides guidance toward simplistic investment strategies.

The Little Book of Common Sense Investing by John C. Bogle. Mr. Bogle is the founder of the Vanguard Group, the largest provider of mutual funds in the world. In this book, Mr. Bogle describes the simplest and most effective investment strategies for building wealth over the long-term. The book also includes further guidance on asset allocation and retirement investing.

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