**The content of this post has been updated with more relevant & in-depth information since it’s original publish in 2016.

How do you retire ridiculously wealthy?

Well, the easy, safe answer I could give is:

“Save more money.”

Whoa. “Stop the presses,” right? Of course if you want to have more money later on, common sense says to put more money away now.

But that’s a total rookie answer, and I’m no rookie when it comes to investing.

What if I told you that you could actually retire 6 or even 7 figures wealthier than the guy saving twice as much as you’re saving?

Let me tell you a story.

Meet James and Dawn.

James and Dawn work together at an advertising agency. James is an account executive and Dawn is a copywriter. James earns a salary that is nearly 3x as much as Dawn’s.

James and Dawn are both habitual savers. They have the exact same workplace retirement plan, a 401k.

James and Dawn work together at the advertising agency for 40 years, each contributing the same consistent amount to their 401ks.

James contributes the maximum to his 401k every year, $18,500 annually. From age 25 to age 65 when he retires, James has invested $740,000 to his 401k.

Okay, James, we see you. That’s a lot of money invested!

Dawn has contributed a more modest amount to her 401k. Dawn contributes $9000 a year to her 401k plan.

From age 23 when she started working at the advertising agency until age 63 when she retires, Dawn contributes a total of $360,000 to her 401k.

Dawn’s total 401k contributions come to less than half of what James invested.

Who do you think is wealthier after 40 years?

Did you guess Dawn?

You rebel. I like you.

James’ wealth after 40 years comes to $2,234,379. That’s nothing to sneeze at. That’s just about 3 times what he put in.

But Dawn. Dawn has had unbelievable success.

Dawn has $3,432,587 when she retires. This woman has close to 10 times the amount of money she put in over 40 years.

How? Especially when James contributed so much more to his 401k than she did?


James is a busy man. He’s laser focused on his career, and interested in little else. When he’s not working late at the ad agency, he’s entertaining potential clients.

Dawn works hard too. In her spare time, she studies how to make her money work as hard as she does. Dawn’s mother was a very successful investor, and she’s determined to be one as well.

Dawn came out on top because she researched and then optimized her investments to increase her rate of return on her money.

The power of compound interest & returns

Although James and Dawn are both avid savers and contributed a significant amount to their accounts, it does not even take this much money to become a millionaire.

A teenager with his first job could put $20 of his paycheck into an account, and if he knew how to invest to get a 10% return, he’d have $1,273,540 if he continued doing that $20 every week from age 15 to age 65.

This is because of a phenomenon known as compound interest.

Compound interest is the single most powerful way to become wealthy.

When you understand compound interest, or compound returns, then learn how to maximize it, becoming wealthy nearly inevitable.

There are 3 factors that determine how much your money can compound.

Compounding factor #1: Contributions

Your contribution is how much money you put into the investment. In James’ case, he was really doing it big here.

Contributions have the most obvious impact on how much money you end up with. The more you invest, the more money is growing for you. This is usually where people think it starts and ends, but we already saw that this isn’t the full story!

Compounding factor #2: Rate of return

Your rate of return is a broad term used to describe the percentage that your investment is making.

Returns can include interest, capital gains (money earned from selling an appreciated asset), and dividends (payments made to shareholders of a company as part of the profit). We cover these various types of returns in depth in Retire Wealthy, the beginners investment course from Bottom Up Wealth!

Compounding factor #3: Time

Time is how long you allow your investment to grow. The longer your money can compound, the wealthier you’ll be.

Time is the factor that will have the biggest impact on how your money compounds.

Unfortunately time is also usually the factor we have the least control over. You may not have taken an interest in making your money work until later in life, and we all only have so much time on this earth.

You have some control over your contributions. You can make investing more money a priority, but for most of us, our free funds have a limit. Not to mention, as we saw with James, more money invested does not mean more money at the finish line!

Your rate of return, however, is the wild card, and can have an enormous impact on your wealth.

What happened in the case of James and Dawn is that while James focused only on putting more money in his account (and little else), or in other words, his maximizing his contribution, Dawn focused on not only her contributions, but also making the most of what she had by maximizing her rate of return.

Let’s take a look at where James lost his wealth.

Causes of low rate of return

In Retire Wealthy, we explore the many different variables that affect your rate of return, or how your money grows, and how to improve them.

Some small but meaningful improvements to these variables can make you a literal fortune, as we saw above with James and Dawn!

James, while he was very dedicated to his work, did not pay much attention to how hard his money was working. He assumed if he invested enough, he’d be fine in the end. And he’s not wrong…he is just fine. He’s got over $2 million dollars!

Dawn, on the other hand, learned investment from her mother, Sherry, starting at a very young age. Sherry taught Dawn to never blindly trust a financial pro, to be actively involved with her money, to invest in quality individual stocks when possible, and to avoid fees like the plague.

Dawn took some time to research her 401k to find the investments that aligned with her goals.

She changed her investment selection immediately when she was hired from the default balanced investment in her 401k. The stocks inside her new selections averaged a 10% a year asset return for the 40 years she was invested. 10% is the stock market average over the last 100 years.

James did not take an active role in the way his money grew.

He stayed invested in the default investment product in his 401k, which was a balanced fund of stocks and bonds. His return with this fund was 6.5% a year on average over 40 years.

Already there’s a huge difference here in the way Dawn and James’ money each grew. This is the first part of the many layers affecting your rate of return.

The return on the core assets inside James’ investment vs Dawn’s is what we call the asset return, covered in depth in Retire Wealthy.

For comparison, if James had contributed the same amount the $780,000 over 40 years, but instead of staying in the default investment, chose to change his investments to the stock funds Dawn had, his asset return of 10% would make his total at this point $8,600,101.

In investing, we call that -$5,244,898 James could have had by actively researching and choosing investments with better returns, but missed out on, opportunity cost.

But it gets worse for James.

James has an expense ratio of 1% on his blended mutual fund, which lowers his average annual return on his investment to 5.43%.

Dawn sought out the investment options within her 401k plan that suited her goals and had the lowest fees possible. Her funds have an expense ratio of 0.15%, which lowers her original 10% rate of return to 9.83%.

The compound returns or compound interest we discussed that is so very powerful, is just as powerful in reverse, when it comes to fees that are charged in your investments or in your accounts.

James’ 1% fee on his investment cost him 24% of his money.

He didn’t even know he was paying it.

These fees can crop up in multiple places in your 401k or other investment accounts, and can be pretty difficult to find if you don’t know where to look.

Even Dawn, who minimized her fees as much as possible, lost 19% of her money on just a 0.15% fee over 40 years.

Compound interest is a two-edged sword. You always want to earn it, but you never want to pay it (or at least, you want to pay as little as possible!)

Dawn and James have the same 401k plan, so their administrative fee is the same at 0.5%. This administrative fee is the cost for anyone using the 401k plan.

This fee lowers James’ total rate of return even further to 4.9% per year. Dawn’s rate of return is lowered to 9.28%.

What you don’t know about your 401k will keep you poor.

Unfortunately, the way our financial system is set up, people who don’t understand the core principles of investing lose out big.

I’m talking a fortune. Billions of dollars are lost by American savers every single year, especially in retirement accounts.

This is because they don’t understand how their money is invested in their workplace plan, or how much it’s costing them, like James.

This isn’t what happens just in a 401k though. The same principles apply to a 403b, TSP, IRA, or anywhere you’re investing!

These are the layers of rate of return that are broken down and analyzed in Retire Wealthy. We then explore how to look at your own account and maximize these different factors that can make or break your wealth!

Rate of return: the factor you can learn to improve

Dawn had a much more limited amount of money she was able to contribute compared to James.

She contributed less than half  as much as James to the same 401k plan. And yet, she has $1.2 million dollars more in hers.

Dawn learned how to optimize her investments and rate of return!

When you read about how to prepare for your retirement, you’ll always hear that you should save more. That’s not necessarily wrong. It’s just way too simplified.

You can increase how much you save, but could be tossing money in the wind if you don’t know how to make the most of what you already have.

James would have had to contribute $10,000 more every year, or a total of $1,144,000 over 40 years, earning that same 4.9%, in order for his account balance to match Dawn’s. And even then, he’d end up with far less because he’d have to put it in a taxable account, which will also kill your rate of return.

It could have been worth his time to take a break from schmoozing clients and ask Dawn what she was reading in the break room, no?

Or better yet, he should have taken Dawn to dinner, charmed her socks off, put a ring on it, and let her handle the wealth building from there!

(Worked for my husband.)

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