Wealth Accumulation

This post was originally published in July 2014.

The analogy I often use when discussing wealth accumulation is rolling a snowball. A snowball starts with a single flake and takes a while to grow. However, as the snowball grows in size, with a larger surface area, that larger surface area attracts more snow, faster.

Giant Snowball

Such is the case with accumulating wealth. While the journey to fiscal fitness often starts with a small investment, as more is added to that investment – and subsequent investments – the portfolio grows. Like the surface area of a snowball, as your portfolio grows – leveraging time and compound interest – it attracts more money, more quickly.

Ideally, a solid fiscal foundation (a nice, compact snowball) is built during young adulthood, the 20s and 30s:

With that foundation in place, those crossing over into their 40s (a place in time that I currently inhabit) are entering their prime earnings years. The prime earnings years? The period between 40 – 60 years of age when most people have settled into a career and are earning their highest income. During this period, individuals should shift their focus from the establishment of their fiscal foundation to wealth accumulation. This period is comprised of three critical elements:

  • eliminating – or minimizing to the greatest extent possible – debt
  • fully funding an established emergency fund
  • maximizing contributions to established retirement accounts

Fortunately, more people are investing in retirement plans. Unfortunately, too many people who are saving and investing are doing it blindly.

They have not calculated the required size of their nest-egg to maintain the lifestyle they desire in retirement. Ask them about the underlying funds in their 401(k), or what the rate of return was for those funds last year, and you are likely to get a blank stare. The key factors in determining the required nest-egg? Current principal, number of years until retirement, rate of return, annual contributions, inflation, and rate of withdrawal. A detailed plan, considering those factors, should be developed and continually tracked – with a tool such as the RWR Simple Retirement Planner – making adjustments as necessary on a quarterly basis.

While eliminating debt completely may not be possible, it should certainly be the objective and a detailed plan should be implemented to achieve a debt-free status prior to retirement. The sooner such a status is achieved, the more money that can be dedicated to retirement plans. At a minimum, credit card debt should be non-existent at this point, leaving only a mortgage, and potentially car loans, as the only remaining debt.

In the first part of this series, it was noted that the two most prominent retirement vehicles for most individuals are the 401(k), a defined contribution plan; and traditional and Roth IRAs, individual retirement savings plans. Ideally those plans have already been established. While it is unlikely that maximum contributions were made, hopefully they were at least consistent. During the prime earning years, every effort should be made to maximize those contributions; $18,000 per year in the case of the case of a 401(k) and $5,500 for an IRA.

Remember, it is less about how much money you make and more about what you do with what you make.

Note that the IRS provides an opportunity for older workers to better position themselves in retirement through catch-up contributions. For those that qualify, workers over 50, an additional $6,000 can be contributed to a 401(k) and an additional $1,000 to an IRA starting in the year they turn 50.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.


  1. The snowball analogy is perfect for wealth accumulation. Today at lunch I was explaining to my girlfriend and some of her friends the importance of putting away a few dollars every month once we get into the working world. I think your analogy makes the concept very simple for people.

    • Good stuff, my friend. Glad you enjoyed.

  2. Excellent analogy.

    As someone nearing the end of the peak accumulation years (being nearly retired) I wholeheartedly agree with Kay’s comment.

    One of the reasons Ed and I are close to retiring is that we’ve never allowed ourselves to get “used to” our current income level. Our spending plan is consistent with the budget we plan to live at in retirement.

    Socking money away in 40s and 50s combined with keeping your lifestyle at an enjoyable but not outlandish level makes for the ultimate wealth accumulation snowball.

    • Thanks for the great feedback, Jean. “Our spending plan is consistent with the budget we plan to live at in retirement.” An absolute must.

      In our late 40s, the wife and I have settled into a comfortable life and a reasonable spending plan that allows us to sock away money in our TSP and IRA accounts; and appreciate the exponential growth in our retirement portfolio.

      Thanks for taking the time to stop by and adding to the conversation. I hope to hear from you again.

  3. Great article! I like the snowball analogy.

    • Thanks for the feedback. I do believe it is an analogy that people can latch onto and get a sense of how time and compound interest impact a portfolio; and importantly, gain an appreciation of the importance of starting early as possible.

  4. In addition to eliminating debt, the wealth accumulation stage should also control upscale spending and consumption for the sake of itself. There are plenty of people who pay down debt and contribute to retirement accounts, but then spend everything else that they earn. While this affects the rate at which you will accumulate wealth, it also has consequences in retirement as you become accustomed to an unsustainable level of spending.

    • “There are plenty of people who pay down debt and contribute to retirement accounts, but then spend everything else that they earn…become accustomed to an unsustainable level of spending.” Great point, Kay. At the end of the day, in retirement it is as much about what you have socked away as it is about what you are spending.

  5. Great article and loved the book! My two cents: Start saving early with whatever you can. This will develop a habit and desire to further your investment knowledge as you progress. Living within our means will limit most debit. I liked your recommendation on debit reduction by improving your situation through a second job or moving up in the workplace by hard work and education. I learned about emergency funds the hard way and will not consider a portfolio without one.

    • Thanks for all the feedback, SavvyDan. Glad you found some value in the article and the book. While it can be tough, a second job might be the only way for someone to get out of the debt trap. You have to get to the point where your income exceeds your expenses in order to start building a retirement portfolio. Otherwise, there is a real danger of ending up in a situation where you are just treading water, not moving forward, and losing valuable time. Myself and the SavvyReaders of this blog are looking forward to your first of many contributions.

  6. For anyone who does not have an idea of how to formulate a retirement plan this post will definitely guide them in the right direction.

    Great post!!!

    • Thanks for the feedback, Leona. And at the risk of this coming across as a shameless plug, I provide a spreadsheet that walks users through running the numbers with the book; they are used in conjunction. I spend a chapter going into great detail about what all of the factors (rate of return, years until retirement, inflation, current portfolio value, etc.) mean and how they impact and relate to each other. I use the fictional Smith family to illustrate the process. Thanks again. It is great having you on board as a regular reader. Make sure you get subscribed to be entered into the new giveaways!

  7. Great article…looking forward for more articles.

    • Thanks for the feedback. New Discussion articles are normally published every Wednesday. Also check out the SavvyRecommendations, where we take a look at informative – some serious, others not so much – movies, television shows, documentaries, and books related to personal finance. New Recommendations are normally published on Fridays. And finally, the SavvyQuizzes, which are published on Mondays, provide personal finance information via five T/F, multiple choice questions.

  8. I agree with Joshua, the information on RetirementSavvy is a great source for those starting out and for those who may have fallen behind. I started taking care of my debt earlier this year and I’m not there yet, but have started to focus on setting up a budget to decrease unnecessary spending. I’ll use any savings to help pay down more debt and save a little extra. I’m also working on creating other income streams.

    This is and will be my go-to site!

    • Thanks for the feedback, Brian. It’s a relatively new site and I am still learning. However, it has come a long way in a short period of time and I believe the Discussions (generally published on Wednesdays), Recommendations (Fridays), and the Quizzes (Mondays) works well as a format for communicating useful personal finance (with a focus on retirement planning) information. Keep an eye out for some new contributors (I’ve had discussion recently with a few) to bring more knowledge and experience to the site. Again, thanks for getting on board.

  9. Hey James, another great post for us readers! I’m working on building my fiscal foundation now at the ripe age of 25. Looks like I’m right on track from what you’ve shared here! Thanks!

    • Thanks for the positive feedback, Josh. Although I haven’t seen much – based on the fact that I have only recently been introduced to you and your site – I would say you are absolutely on the right path. Considering that most 25 year olds (and 30, 40, 50 year old individuals I would add) are not planning/saving/investing at all; or are doing so, but doing it blindly, you are ahead of 90% of the pack. I did not get financially educated and focused until my early 30s, a little later than I wished, but a lot sooner than most. Great to see you again. Take a minute to subscribe and get in on the giveaways!

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