As the title of the popular game show suggests, everyone wants to be a millionaire. But how do you get there? The truth is that you don’t have to be an internet entrepreneur or even a genius to get there. With a little guidance, discipline, and patience, people earning even modest incomes can build $1 million portfolios by the time they retire.

Meet Ashley

On paper, Ashley is pretty average. Ashley is 30 years old and earns $42,640 a year, which is the median salary for her age. Ashley wants to retire someday and has decided that she’s put off starting to save long enough. Ashley decides to set aside $2,000 each year to pay her future self. Saving $2,000 every year will accumulate to $70,000 by the time Ashley reaches age 65. That’s not bad, but Ashley understands the power of compounding returns (possibly because she read this article), and knows that she could turn that $70,000 into something much bigger by putting her money to work for her and investing the money she saves.

Ashley Gets Started

Ashley’s pretty smart, so she gets to work and does some research to come up with an investment plan. She understands that building a balanced portfolio is good because it helps insulate the portfolio from normal market fluctuations. She identifies a number of mutual funds and considers investing in a small-cap fund, a mid-cap fund, a large-cap fund, an international fund, and an indexed fund. That’s a pretty well-rounded portfolio. Ashley calculates that if she diligently adds $2,000 to the portfolio every year to pay her future self, and if her portfolio performs well over the next 35 years, she could average a nominal annual rate of return of 8.5%. That sounds like a pretty good plan.

Despite her research and calculations, there are some expenses Ashley hasn’t considered: some of the mutual funds in her portfolio charge her fees, and she also had to pay capital gains taxes over the years as the assets in those funds turned over. If Ashley’s portfolio incurs average mutual fund expenses of 1.09% and capital gains taxes (at 15%) caused by average fund turnover of 85%, Ashley’s actual rate of return would be 7.4%.

Despite those pesky unanticipated expenses, if Ashley chooses this investment strategy, by the time she turns 65 her portfolio would be worth $255,514. That’s a lot better than $70,000, and it’s a pretty impressive demonstration of the power of compounding! She’s come up with a good plan. But could Ashley do better?

Ashley Gets Smart

Ashley dives back into her research (perhaps by reading this article) and realizes that, due to inflation, the value of the $2,000 she plans to pay herself every year declines over time. In other words, by saving a flat $2,000 every year, Ashley would actually be contributing less and less to her retirement every year. Fortunately, being pretty average helps Ashley here because it means she can expect an average salary increase of 3% per year. Armed with this new information, Ashley does the analysis and decides to increase the amount she pays herself each year as her salary increases. Every time she gets her average 3% raise, she’s going to pay her future self by adding the first 1% bump to her annual savings amount and then by enjoying the other 2% immediately. By making that adjustment, the value of Ashley’s portfolio would balloon. Assuming the same nominal 8.5% annual return, Ashley’s portfolio would be worth $1,083,477 by the time she reaches 65. Wow! That sounds like an even better investment plan.

By making that clever adjustment—adding the first 1% of her salary bump each year to her annual contribution rate—Ashley’s portfolio would skyrocket in value and be worth four times more than it would have been if she had followed her initial plan. Ashley can retire a millionaire at age 65. That’s fabulous, and definitely a better plan. But could Ashley have done even better?

Ashley Gets Even Smarter

If you’ve been paying attention, you’ll know that the answer is YES! Remember those pesky management fees and capital gains taxes that reduced the nominal 8.5% gain in Ashley’s portfolio to only 7.4%? It turns out Ashley digs a little deeper and figures out a pretty easy way to reduce those expenses as well.

Instead of buying mutual funds with average management fees and average turnover (thereby triggering capital gains taxes), Ashley can invest in passively managed exchange traded funds (or ETFs) that are designed to be tax efficient—they are specifically designed to minimize the turnover that triggers capital gains taxes. If she follows this strategy, her portfolio would be worth even more. And, because Ashley is super-duper smart, she discovers a way to make investing in highly efficient ETFs even easier. Instead of spending her time researching options and actively monitoring and periodically rebalancing her portfolio, Ashley can simply open an Evati account and let us do all of that work.

Evati has spent a lot of time and energy finding passively managed, highly efficient portfolios just like the ones Ashley found that would give her portfolio the biggest boost. That is because we understand that the value of your account (even with the boosting effect of compounding) can be significantly eroded by unnecessary expenses, like fees and taxes.

By opening an account with Evati and paying herself $2,000 plus adding the first 1% of her annual salary raise each year with the same nominal 8.5% annual rate of return, Ashley’s portfolio is projected to be worth a whopping $1,319,085 by the time she turns 65.

In other words, by letting Evati do all the research to find highly efficient investments and handling the monitoring and rebalancing required to maintain the appropriate allocation of those investments, Ashley could earn an additional $235,607 for her retirement. That’s pretty awesome for someone who at first glance looked kind of average!

The Choice is Yours

In the chart below, the gray line represents the portfolio for Ashley’s Good Plan, where she pays herself $2,000 per year and invests for the future. The blue line represents the portfolio for her Better Plan, where she pays her future self $2,000 and then adds 1% of her annual salary raise each year to her contribution rate. The purple line represents the portfolio for Ashley’s Best Plan – she pays her future self $2,000, adds 1% of her annual salary raise each year, and then chooses investments that are passively managed and highly efficient, like the portfolios offered by Evati. Which portfolio would you rather have when you retire?

Let’s sum it up

So, what have we learned vicariously through Ashley?

  • Start now. The earlier you start, the better off you’ll be. Time is your friend when it comes to investing and those later years are where compounding has its greatest effect.
  • Contribute regularly. Obviously, the more you contribute the better off you’ll be. Just look at what happened when Ashley decided to pay herself first by adding 1% of her annual salary raise each year to her annual contribution rate in addition to the initial amount of $2,000 per year. Her portfolio rocketed in value.
  • Avoid unnecessary fees and expenses. Take advantage of services that are efficient with respect to both fees and taxes, like those offered by Evati. With the options available to investors today, there’s no reason to overpay mutual fund managers or Uncle Sam. After all, wouldn’t you rather keep that projected $235,000 for yourself?

If you want to take advantage of the tools to help you follow Ashley’s best plan, download the Evati app today and start down your path to financial fitness.