I love spreadsheets. Microsoft Excel was one of my favorite pieces of software when I was working on Wall Street, along with my Bloomberg terminal. I wrote macros to automate many of my daily tasks. I had many keyboard shortcuts memorized, so that I could work faster and minimize the use of a mouse.

Before I started medical school, I made a spreadsheet projecting my net worth. The spreadsheet began in my MS-1 year until age 70. It was fun tinkering with all the possible variables. With different assumptions, my net worth at retirement would change dramatically. I could change my attending salary, resident salary, medical school tuition, housing costs, and total costs. However, the single most important determinant of the final net worth at retirement was none of these values. In fact, it is something that we have the least control over.

The Importance of Investment Returns

More than salary or costs, investment returns were the biggest determinant of our net worth at retirement in my spreadsheet. My wife was always very conservative, assuming just a 2% return. She is the prudent half of our relationship. As a high-salary professional, we should not have to rely on luck to achieve our financial goals. We should be able to achieve financial independence in good markets and bad.

Of course, the more realistic assumption of investment returns would be approximately 5%. But it always made my wife and I laugh when we would put in optimistic return assumptions, like 8% or 10%. It was almost silly how the money would compound in our spreadsheet. But how realistic is this?

When you look at historical rolling 30-year S&P 500 stock market returns, you see a wide range of possible returns. It was as low as 8% during the Great Depression, and as high as almost 15% from 1970-2000. So there is a 7% range between the best case scenario and the worst case scenario, using historical returns. Past performance is not a guarantee of future market returns, but it’s reasonable to plan for this range of possible returns during our working years. After taxes and inflation, both my wife’s conservative 2% and our wildly optimistic 9% investment returns are conceivable. So how would our final portfolio value differ under these two scenarios?

Assuming a 5% return, our portfolio at retirement would be $5.4 million, according to our spreadsheet. Looking at the extremes,a 2% return would leave us with $3 million in retirement, while a 9% return would leave us with $13.5 million in retirement. Oh, the things we could do with an extra $10 million dollars in retirement! Here’s how other assumptions would affect our retirement nest egg:

Other Factors

Salary: Increasing your salary will obviously make a significant difference in what your final retirement number will be. The difference between a $300,000 and a $400,000 salary would be $4.25 million more in retirement. A big difference, but not as much as your investment returns.

Costs: Decreasing your costs can also make a big difference in what your final retirement number will be. Using Physician On Fire’s 4 Physicians example, if you go from Physician B ($120,000 annual spending) to Physician A ($80,000 annual spending), then you would have an extra $2 million in retirement. A big difference, but not as much as your investment returns.

Medical School Tuition: This is actually the least important of the variables. While the difference between an in-state medical school and a private medical school is approximately $120,000 over 4 years, this would yield a difference of approximately $800,000 at retirement. It’s certainly worth considering a state school over a private school, but it won’t make as big a difference as your investment returns.

It is clear that investment returns can be more important than even your attending salary or living expenses in determining your nest egg at retirement. And unfortunately, we cannot know in advance if we will get 2% returns or 9% returns.

How Can I Increase My Returns?

So what is the take-away of all of this? Should you pour all your efforts into trying to eke out higher returns?

While most efforts to increase your returns (i.e. trading) will be futile, there are a few things you can control. The first thing is to keep costs as low as possible. By using low-cost index funds, you can save up to 1-2% in investment fees compared to some actively managed funds. The second thing is to invest in a tax-efficient manner. Make full use of tax-advantaged accounts to improve your after-tax returns. Use your HSA, 529, IRA, and 401k to minimize the amount of taxes you pay to the IRS. Minimize trading to avoid incurring unnecessary short-term capital gains and take advantage of tax-loss harvesting opportunities. The third thing is to take as much risk as you are comfortable with. It is hard to get good investment returns without taking some risk in the stock market.

What you should not do is start trading in order to chase extra returns. This only makes you more less likely to achieve your goals by decreasing your diversification. Instead of having a range of 2-9% returns, a less diversified portfolio would have a range of -6 to 17% returns. The expected return is the same, but you put yourself at risk of having disastrous returns that puts your financial future in jeopardy. My wife and I are controlling the things we can control (salary, expenses) to ensure that a 2% return can achieve our financial goals. A -6% return during our working years would be difficult to overcome. Using our spreadsheet, we would have $1 million in retirement if we had a -6% return. Certainly that’s enough money to retire on, but it’d be much less than we would have hoped or planned.

Do you think investment returns are the biggest factor in your final nest egg? If not, what is?


  1. This post made me feel good. Despite all of my past money mistakes, if my investment returns are good I will make it to retirement in one piece! It is interesting how medical school debt or the extra $100K in earnings does not make the difference that investment returns do….Let’s hope this stock rally continues!

  2. Investment returns are definitely are big part of my portfolio. The higher the returns are, the faster I will be able to retire as long as I maintain a frugal and minimal spend lifestyle.

    It’s been great to see the market run so well for now, I just hope it continues to grow that way for a while.

    • Good luck, Smart Provisions! Sounds like you are doing everything right. Earning more money and being more frugal are of course essential parts of the personal finance equation, but great investment returns can overcome deficiencies in other areas.

  3. Excel is a wise teacher.

    I’ve run scenarios to find out where our net worth will be at various time points if I decide to retire, continue working full-time, or drop to part-time.

    The largest determinant is not how much I work, but how much the market returns over the next couple decades.

    The result doesn’t make me want to work any harder, that’s for certain!


  4. After this recent long bull market, valuations are high, and future expected returns are modest. Combine that with low interest rates, and the investor should be using some very modest return estimates for his projections.



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