Avoiding the Stock Market May Cost Millennials $3.3 Million

By Arielle O'Shea and Stephane Lesaffre

Research suggests millennials have largely resisted investing, instead favoring “safe” vehicles like savings accounts and plain cash. A new NerdWallet analysis puts the potential cost of avoiding the stock market at over $3.3 million in lost retirement savings by the time today’s 25-year-old millennial retires at 65, assuming future economic and market conditions don’t veer sharply from historical averages.

NerdWallet looked at the last 40 years of market returns and interest rates to determine how much a 25-year-old who today earns a median annual income for that age ($40,456) and saves 15% would accumulate over the next 40 years, if conditions were similar to those of the past four decades.

We examined our hypothetical investor’s retirement savings across three scenarios:

  • Fully invested in stocks
  • Deposited in a standard savings account
  • Holding all funds in cash, either literally or in a non-interest-bearing account.

To capture the wide range of possible outcomes, we ran thousands of simulations based on historical returns and volatility. For simplicity, this analysis focuses on a portfolio 100% invested in the market, but that allocation may be too aggressive for some millennial investors.

For details on our calculations, see the methodology.

Key findings

  • The path to millions is paved with stock market returns: Despite several periods of market volatility over the 40-year period analyzed, the analysis shows the stock market scenario coming out well ahead of the other two scenarios, accumulating $4.57 million by the end of the period, before adjusting for inflation and after accounting for annual investment fees of 0.70%.
  • A savings account can’t keep pace: In the scenario in which the saver deposits all retirement savings in a savings account, the outcome is a healthy but much lower $1.27 million by the end of the period, before adjusting for inflation. That puts the potential cost of keeping money in a savings account rather than investing in the stock market at over $3.3 million during a 40-year time horizon. The opportunity cost of leaving a sum that large on the table could be a bigger risk to millennials than stock market volatility. Sixty-three percent of 18- to 34-year-olds surveyed are saving for retirement in a savings account, according to NerdWallet’s 2016 financial health survey.
  • The cash-under-the-mattress approach fares the worst: Here the savings contribution of $563,436 over a 40-year period gains no value at all — and results in a shortfall of over $4 million compared with the stock scenario.

NerdWallet’s analysts used 40 years of inflation data, Standard & Poor’s 500 returns, and three-month Treasury rates — a proxy for historical savings account rates, which were unavailable for the full time period analyzed — to determine the potential accumulation in each scenario, which was calculated based on the value of the portfolio before adjusting for inflation.

» Curious about inflation and purchasing power? Use our inflation calculator to find out how the value of a dollar has changed.

Historical returns don’t promise future returns

It’s unwise to assume that past market returns will dictate future returns. In fact, some analysts have advised investors to expect lower market returns going forward. But the comparison still makes a strong case for the value of investing in stocks — in this case, through an S&P 500 mutual fund — over a long time horizon when compared with savings accounts and cash.

To get a clearer indication of how investors could fare over a 40-year time frame, NerdWallet performed a Monte Carlo analysis, running the historical S&P 500 and Treasury data through 10,000 possible scenarios.

This process uncovers the probability of a range of possible outcomes by considering not just historical returns, but also the volatility of those returns — how far and how frequently the return strayed from the historical average.

While there is no way to predict future market behavior, the simulation found that for the 40-year period analyzed, stock market investors had over a 99% chance of maintaining at least their initial investment — as they would in cash or a savings account — and a 95% chance of accumulating at least $1.67 million, or nearly three times their initial investment. Those who instead chose a savings account had less than a 3% chance of tripling their initial investment. These figures were not adjusted for inflation.  

“In the short run, the ups and downs of the stock market can make investing seem quite risky. But our simulations use historical volatility to show that over the long term, stock market fluctuations can balance out and generate largely positive outcomes a majority of the time,” says Kyle Ramsay, a chartered financial analyst and head of wealth at NerdWallet. “The long-term story is something millennials ignore at their own risk.”

Millennials can embrace their long time horizons

Despite those odds, survey after survey has shown that millennials shy away from the stock market. In addition to the 2016 NerdWallet survey that found 63% of millennials store their retirement savings in a savings account, a 2015 BlackRock report indicates that 46% of millennials believe investing is too risky, holding the highest cash allocation of any age group at 70%. And a Legg Mason survey from this year reported that 85% of millennials define themselves as either “somewhat or very conservative” when investing.

The long-term story (of investing) is something millennials ignore at their own risk.

Kyle Ramsay, CFA, Head of wealth at NerdWallet

These results aren’t surprising: Millennials came of age during the 2007-08 financial crisis, either investing for the first time during it or watching parents suffer the fallout. But context is key: Our 40-year analysis includes the Great Recession — the market ended 2008 down 37% — as well as the dot-com bubble burst and several other years of significant losses.

Still, the S&P 500 had an average annual return of 10.96% during the 40-year period analyzed, before inflation. By contrast, three-month Treasurys had an average nominal return of 4.61%.

“The biggest force millennials have on their sides is time,” Ramsay says. “Investing over 30 or more years should help young professionals weather the short-term storms in pursuit of long-term goals like retirement.”

In fact, even if someone invested only over the 10-year period ending in 2016 — which includes the Great Recession — the numbers still come out in favor of the stock market by a wide margin: The average annual nominal return of the market was 6.88%, while Treasurys averaged 0.65%.

And in a worst-case scenario, such as a recession that occurs at or near an investor’s planned retirement age? It’s painful to consider the prospect of delaying retirement or retiring with a down investment portfolio, but the analysis found recovery is typically swift: Since 1976, S&P 500 returns including dividends have recovered 90% of their value within three years of a downturn four times out of five — including post-2008. Only in the 2000 downturn did the S&P 500 take longer to recover, taking five years to recover 89% of its value.

Keeping retirement savings out of the market wastes hard-earned dollars

There are good reasons to keep money in a savings account, such as maintaining an emergency fund, which generally should be kept liquid so it can be tapped when needed.

But as the analysis shows, when it comes to far-off goals like retirement, not investing comes with an opportunity cost — in this case, $3.3 million to $4 million — that will dramatically shrink the saver’s eventual nest egg.

Investing also helps cover a range of financial blemishes. The analysis is based on a steady contribution of 15% of income, with annual salary adjustments for inflation. Most long-term investors will find their savings rate fluctuates with various lifestyle changes and milestones, and rarely is income on a constant upward trajectory.

If there are years when you don’t save money, the money you’ve already invested continues to work for you during that time. Funds kept in cash or savings vehicles that can’t match inflation will inevitably lose purchasing power during those periods.

Diversification and appropriate asset allocation significantly reduce risk

It’s worth highlighting that the returns surfaced in NerdWallet’s simulations are not dependent on risky trading behavior, but instead on regular contributions into the kind of broad-based equity mutual funds offered in a 401(k) or individual retirement account.

Mutual funds, specifically low-cost index funds and exchange-traded funds, allow investors to instantly spread their money around a wide range of investments. An S&P 500 index fund, which could have posted average annual returns similar to the findings in our analysis, allows an investor to hold a piece of up to 500 large U.S. companies with a single transaction.

Today, one can easily and cost-effectively achieve diversification via index funds.

Kyle Ramsay, CFA, Head of wealth at NerdWallet

“While consumers have more investment options today, they should still watch out for high fees that could ruin their future returns,” Ramsay warns. “Today, one can easily and cost-effectively achieve diversification via index funds. And if you don’t feel confident managing your investments yourself, there are numerous low-cost robo-advisors who can do it for you.”

Investors should also carefully select an asset allocation that meets their goals and their risk tolerance. An aggressive millennial investor may start out with a 100% equity allocation, as shown in this analysis, then slowly dial that down as retirement approaches. But even young investors may feel more comfortable allocating a percentage of their portfolio to bonds, and an investor who is closer to retirement age may want to hold just 50% to 70% of his or her portfolio in stocks. Investors can use an asset allocation calculator to determine the best investment mix for their needs.


 Busting some common investing myths

  • MYTH: You need a lot of money to invest. ETFs trade for a share price that can be well under $100, funds in a 401(k) account have no minimum investment requirement, and many online brokers let you open an account with no initial deposit. For more tips on how to invest small amounts, see NerdWallet’s guide to how to invest money.
  • MYTH: You need an employer-sponsored retirement plan to save for retirement. A 401(k) or other employer plan gives you a leg up, especially if it matches a percentage of your contributions, but retirement savers without access to a company plan can still invest for retirement through an individual retirement account. Check out our IRA guide to see if an IRA is right for you.
  • MYTH: There’s no help for casual or small-dollar investors. Investors with small balances can now take advantage of robo-advisors, services that manage your investments with computer algorithms. With that reduced overhead, management fees and account balance requirements are significantly reduced or, in some cases, eliminated. Learn more about robo-advisors and compare their fees and features in NerdWallet’s comprehensive robo-advisor breakdown.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @arioshea. Stephane Lesaffre and Diamond Richardson contributed data analysis to this report. 


Annual savings were calculated as 15% of income for a 25-year-old with a starting salary of $40,456, the median for 25- to 34-year olds according to Bureau of Labor Statistics weekly earnings data. The salary was increased annually by 3.7% for inflation, based on average consumer price index data for the time period studied. A consistent 15% savings rate was used to meet a common rule of thumb from financial advisors.

Nominal returns were calculated using the 40-year period from the close of 1976 to the close of 2016. Investment returns are based on nominal Standard & Poor’s 500 returns over that time, with dividends reinvested. Nominal three-year Treasury bill returns were used as a proxy for savings account interest rates, which were unavailable for the full time period analyzed.

We calculated accumulation in two ways:

  • We took the geometric mean of each year’s S&P 500 return and annualized three-month Treasury returns over the 40-year period, and then applied those to a 25-year-old beginning to invest today.
  • We ran a Monte Carlo analysis to simulate potential median returns over the 40-year horizon, based on the historical mean return and standard deviation of the S&P 500 and three-month Treasurys.

The average annual S&P 500 return as calculated by the geometric mean was 10.96%, and the average annual three-month Treasury return was 4.61%, which we rounded to 4.6%. Compounding the hypothetical investor’s annual contributions over 40 years using these historical mean returns results in the investor having $4.57 million when invested in stocks, versus $1.27 million when investing in a savings account or three-month Treasurys. The Monte Carlo simulation returned a 50% chance of ending up with at least $4.95 million in the stock market. We chose to use the smaller number as the primary result.

The stock market investment return was reduced by fees, calculated as 0.70% annually, based on the rounded average of 15 years of 401(k) mutual fund expense ratios, as reported by the Investment Company Institute.