You can’t save your way to a million dollars

There’s a common personal finance saying that’s incredibly relevant to military members and it’s, “You can’t save your way to a million dollars.” You simply can’t stash your money away in a simple savings account earning less than 1% interest—you must invest your money in a way that earns a positive rate of return. The decision not to invest can literally cost you hundreds of thousands of dollars.

I calculated a non-prior enlisted officer’s 20-year pay chart, excluding BAH (explained in the assumptions below), at different savings rates and different annual returns. To reach a million dollars at 20 years, an officer would need to save 20% of his or her paycheck for 20 years, at a 12% annual rate-of-return, and then he or she would have approximately $1M. If you save 50% of your paycheck and choose not to invest it, after 20 years you’d only have $785K—a loss of nearly $225K AND I imagine that almost no one can reasonably live off only 50% of his or her paycheck. 

For most of us, a 20% savings rate at a guaranteed 12% return rate is unlikely—closer to improbable. After 2 decades of helping people with finances, it’s difficult to convince people to save at least 10%. While reaching $1M at 20 years is an aggressive goal, reaching $1M by 65 is definitely attainable for ALL of us.

You may not become a millionaire by saving for 20 years, but you’ll set the foundation for guaranteed millionaire status during retirement by following these recommendations:

• Start Right Now – Unless this is your first day in the military, then you may already be behind the power curve. My assumptions track an officer starting to save the first month of his or her active duty. If you’re saving 0% right now, then try going to MyPay and at least put 1% towards your TSP. I can almost guarantee that 99% of people can live without that 1%.
• Increase Your Savings Rate – Probably the one step that’s mostly in your control, is to increase how much you save. Assuming a 10% annual return, a 10% savings rate after 20 years, would give you $426K, while a 20% savings rate with a 10% return would give you twice the amount of $852K. Considering the “real” inflation of nearly everything we buy, we must consider saving more than 10%.
• Increase Your Rate of Return – Keeping your money in cash will cost you thousands of dollars in just 20 years. At today’s interest rates, most banks pay less than 1% in interest, compared to 4-12% that many Total Stock Market mutual funds are able to return. The difference between a 10% savings rate at 1% at 20 years and 10% in 20 years is nearly $254K ($426K vs. $172K). By the time, you’re 65, the difference will be several hundreds of thousands of dollars. To increase your savings rate, I typically recommend that investors under 55 should be invested in Vanguard’s or *Fidelity’s Total Stock Market mutual funds. If you’re in the TSP, I recommend getting out of the “G” fund (the default fund) and move into the appropriate LifeCycle funds.
• Make Your BAH Work For You – In my assumptions for calculating the rate of return, I purposely did not include BAH because you must choose to make it work for you, and it’s not always entirely within our control. When you correctly use your BAH (by buying your homes or renting less than your rent and utilities), the portion that is going to buying down the principal or excess BAH (if renting) should be added to your savings rate. If you save $800/month in investments and $200 of your mortgage payment going towards principal or excess rent, then you’re actually saving $1K. If you rent above your BAH or live on base, then $0 can be counted towards your savings rate.

BL:  Not saving, or just putting your money into a savings account will cost you hundreds of thousands of dollars and will force you to work well into your retirement years. You can’t save your way to a million dollars—you must invest it. Start today, save more, invest better, and consider making your BAH work for you. You can easily have $1M by the time you retire.

Assumptions:

• My assumptions did not include the “theoretical value” of our military retirement because that’s dependent on the interest rates (or inflation rate) when you retire. I’m simply looking at how much extra you could earn by investing your money versus just saving. You can see the “theoretical value” of a military retirement here.
• I used standard promotion rates (a.k.a. “In the Zone”[Air Force]) to calculate future savings rates. There will be variances. For example, I know Marines promote to O3 (Capt) later than other services which would impact the calculation rates.
• I did not include inflation, because this is a simple calculator. But it’s worth noting that inflation will destroy your savings even further if not properly invested. As such, all future promotions were based on the 2016 Basic Pay Chart.
• As already explained, I did not include BAH rates in my calculations. There are too many probabilities that would prevent an apples-to-apples comparison of saving and investing.
• I didn’t calculate all the way until 65 on purpose. 1) My goal is to help people retire by 55 and 2) A twenty-year career is easier to grasp than a 65-year old goal. It’s hard enough getting people to forecast 30 days into the future, so I try to keep it simple.

*Full Disclosure: After nearly 15 years of inconsistently beating the stock market, I’ve put most of my portfolio in Fidelity’s Total Stock Market mutual fund (FSTVX).