Meeting Future Goals Without Stocks – Just Save LOTS More Money!

As controversial as yesterday’s post was, it did raise some interesting questions:

What if you’re too scared to invest in stocks?

Can you meet future goals like retirement without stocks?

Of course the answer to the last question is yes. Yes, you can still reach your financial goals without stocks – it’ll just take A LOT more money! How much more? Well, take a look at the graphic I put together in Excel:

Meeting Future Goals

As with all hypotheticals, I had to make some assumptions:

1. To arrive at my expected rates of return and expected inflation rate I used the numbers found in Morningstars SBBI 2007 Yearbook:

Asset Returns

2. I assumed that the person in this example is in their 40s and has 20 years to reach their goal, which is $1,000,000 in today’s dollars.

3. I assumed that they currently have $100,000 in savings that will be applied towards their goal.

4. Finally, I assumed that 100% of the money was invested in each asset class in each example, which isn’t realistic in real life. Most people would have an asset allocation plan utilizing different asset classes and not put all their money in T-Bills, Bonds, or Stocks.

As you can see from the first graphic, this person would have to save $55,400 per year if they wanted to reach their goal without using stocks. That’s more than $4,600 per month! So, although it can be done, I wouldn’t advise it since most people still need to eat and have a place to live and clothes to wear!

The Large Company Stocks example still requires annual payments of over $18,000 ($1,500 per month), which is still pretty high but within reach with company matches.

All this brings us back to the first question, which was “What if you’re too scared to invest in stocks?”

My advice: get over that fear! Read books on long-term investing to familiarize yourself with how stocks work. You can do a lot to spread your risk by buying an index fund rather than individual stocks. Just be sure to keep your expenses low. Finally, when the market is down, take a look at this chart, which details the inflation-adjusted 20-year rolling period returns of large company stocks. Over the long-term stocks rule.

20 thoughts on “Meeting Future Goals Without Stocks – Just Save LOTS More Money!”

  1. Excellent post! I just found your site today and really like the layout of the site and the information inside. The charts are terrific. The fact of the matter is: Stocks outperform bonds, money markets, CD’s, etc. over the long run. An investor must understand that ups and downs happen, the worst thing one can do is panic sell. Avoiding stocks is hurting your bottom line over the long run, that’s for sure.

  2. Great post, JLP. I’d love to see a simulation that takes into account the variation inherent in different investment types and looks at the probability of meeting your goals under different scenarios. Presumably the income-type options will be far more predictable in their outcome, as is evidenced by their lower standard deviation. Said another way, you are almost assured of hitting your mark by saving tons more in a very stable, but poor-yielding investment. So how much would you need to save in a more aggressive scenario to be, say, 90% certain that you’ll meet your goals.

  3. Oooh, Nickel, that’s exactly what my husband and I have been discussing of late. We were thinking of taking all the data from the S&P, divide it up into all 10 year bins (by month), and figure out what the probability is that we will get an 8% return, 10%, etc. I know JLP has done bins like this in the past, but we were thinking about making it into a question of probability.

    BTW, JLP, great post! It’s a great point to make!

  4. Andy,

    I think a person should use Small Cap stocks. However, due to the volatility as expressed by the Standard Deviation, I wouldn’t recommend putting all of your money in small caps.

  5. Asset allocation in mostly stocks until you get close to retirement age (which you would then switch into bonds) is generally considered the best investment of your money. How you allocate your assets however, is up to you.

  6. This is a nice simulation and shows how unrealistic the savings rate are if we don’t invest in stocks. Also we whole heartedly agree that to mitigate risks its best to divide our assets in all the three domains, Large Cap, Mid Cap and Small Cap.
    If we don’t engage in active trading but go for well established long term policies of buying and holding index funds or ETFs, the stock market is not such a scary beast. But hey we have to take some calculated risks to get ahead in life else we might be still living in the stone age!

    FIRE Finance

  7. My great-aunt amassed a few hundred thousand and bought her last house outright in cash by putting a part of her small secretary’s salary into CDs and savings accounts over the course of her working lifetime from the 1930s to 1970s.

    It was a tiny fortune but it was safe. But then she started out young — time worked for her.

  8. After reading Nickel’s comment (great point and an important one), I applied JPL’s numbers to a probability test. I came up with an 85% probability that the T-Bill scenario would result in at least $1,806,111 in 20 years. The long-term gov’t bonds has a 58% chance of same, and large caps were at 55%. But this isn’t useful by itself, so I checked to see how much more savings are needed to get the bond and stock scenarios on par with the T-bill odds (apples-to-apples-to-apples).

    Saving $55,400 per year in cash, saving $54,760 per year in bonds, and saving $33,080 in to stocks all had an 85.1% chance of having at least $1,806,111 in 20 years.

    I also wanted to see how much is need to get to the 90% Nickel suggested and got: $57,330 per year in cash, $58,410 per year in bonds (yes, this is correct. The bond savings number is higher than the cash number at the 90th percentile, this is due to the risk/reward relationship), and $37,400 per year for stocks.

    When you take risk into account the numbers are less dramatic but still a compelling case for using stocks. Also keep in mind that this was based on a 20-year time horizon. In reality, people do not save for retirement over 20 years and then spend it all the day they retire.

    Another point to make is that this was a pass/fail test, so even if the simulated results yielded $1,806,110 ($1 shy of the goal) after 20 years, it was counted as unsuccessful.

    The risk/return numbers I used were slightly different than the ones from SBBI (It is a pain to change the numbers in the software, but the important thing is that they were used consistently across all of my calculations).

    I used T-Bills (4.29% mean return, 4.52% standard deviation), Lehman Brothers Long Gov’t index (5.8% mean return, 8.87% standard deviation), and the Russell 1000 index for large cap stock (12.32% mean return, 18.38 standard deviation).

    I also assumed everything was taxable with no other taxable income and used California numbers for the state tax liability.

    Yes, this was a pretty geeky way to spend an evening.

  9. Dylan, that’s a fantastic analysis. Not surprisingly, it provides support for JLP’s view, but it’s reassuring to see that the inherent volatility of stocks doesn’t really change the conclusions substantially. Nice job.

  10. Dylan, that is fascinating! Maybe nickel or JLP can have to do a guest post to go into more detail. =)

    I’m really glad that the longer you hold your investments with DCA, the less risky they are. Certainly makes volatility look more like blips when they occur.

  11. just not that complicated. 3 components to invest in during a lifetime. buy a home as soon as you can. sock away as much as you can as early as you can into any total stock market no load index fund. when you reach double nickles (55) and retirement looms, start fixed incoming with cd’s.

  12. Nice work Dylan. We really like muddleheads’s simple advice. That is in fact the essence of what we all are trying to achieve:). The Journal of Financial Planning conducted another great simulation to form some National Savings Rate Guidelines for individuals. According to the authors, these savings rates have a 90 percent chance of success. Altogether the authors ran more than 72 million simulations to ensure a high probability of success with these savings rates. They performed Monte Carlo simulations, running each combination of age, income level and savings rate through 2,000 market scenarios. The details are here:

  13. Fantastic. I’ve really enjoyed the last few posts. Even the baggy pants one.

    It is too bad that the “debate” at thesimpledollar didn’t seem too productive, but I think a lot of people appreciated the work you put in.


  14. “Another point to make is that this was a pass/fail test, so even if the simulated results yielded $1,806,110 ($1 shy of the goal) after 20 years, it was counted as unsuccessful.”

    That will favor bonds much more. With stocks you have a very real possibility of *SIGNIFICANTLY* missing your goals due to the high std deviation. If you are unlucky and get the bottom 5% or so of returns you will be pretty screwed.

    This is not true with bonds.

  15. Andy: Remember, the stock scenario assumed you were saving *way* less money, so the concerns that you expressed can be remedied by ratcheting up your savings a bit (but still well below the bond or cash scenario). In reality, you’re going to invest in a mix of asset classes, so the truth in all of this is somewhere in between. The bonds will serve to stabilize the portfolio, whereas the stocks will supercharge the returns.

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  17. Returns from 1926 to 2006 were great in the stock market, especially since there was a pristine global environment to exploit and a relatively low global population. But we aren’t going to see those glory days again, so isn’t it more likely that enviromental problems brought about by overpopulation and over-exploitation will put a huge dent in stock gains over the next 20 years? I think so. I think the world will increasingly resemble Haiti in the next 20 years — overcrowded, poor and chaotic. Therefore, T-bills are probably the best route.

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