Compounding Returns: How A Janitor Can Become A Multi-Millionaire By Saving 10% Of Their Income



"...but whoever gathers money little by little makes it grow." Proverbs 13:11 (NIV)

Compounding returns are incredibly powerful. I wish I had paid more attention to this principle when I was young. Obviously, we would do well to reach young people with the message that saving and investing early on in life is by far the most important financial decision they can ever make. While the title of this article is a little bit gimmicky, it's also 100% true. Please let me demonstrate how.

According to Salary.Com, the average janitor in the United States earns $25,281 annually. I wondered how much a janitor who saves 10% of their gross income every year from ages 18-65 and invests it all in the U.S. stock market via index funds, would end up with at retirement. The answer is probably difficult to believe if you've never seen demonstrations of the power of compounding returns. But you can check the math and the data yourself. I use an assumption that the janitor starts working on the day they turn 18 and stops working on the day they turn 65. I assume that the janitor's salary goes up with inflation, which I assume to be 3% per year going forward (in line with historical average). I also use an assumption of 9.55% average annual returns for the stock market, which is the historical average. I use .05% as ongoing investment expenses (which is the cost of a Vanguard S&P 500 ETF). I assume that the janitor buys the ETF once per year, at the end of each year, and pays $7 in commission per trade (which rises with inflation) to an online discount broker.* Here is how the numbers shake out:


Age Annual Savings Terminal Value
18 $2,521 $163,916
19 $2,589 $153,758
20 $2,660 $144,240
21 $2,732 $135,321
22 $2,807 $126,962
23 $2,884 $119,127
24 $2,964 $111,784
25 $3,045 $104,900
26 $3,129 $98,446
27 $3,216 $92,395
28 $3,305 $86,722
29 $3,397 $81,401
30 $3,492 $76,411
31 $3,590 $71,731
32 $3,690 $67,342
33 $3,794 $63,224
34 $3,900 $59,361
35 $4,010 $55,737
36 $4,123 $52,337
37 $4,239 $49,147
38 $4,359 $46,153
39 $4,483 $43,344
40 $4,610 $40,707
41 $4,741 $38,233
42 $4,876 $35,910
43 $5,016 $33,730
44 $5,159 $31,683
45 $5,306 $29,762
46 $5,458 $27,959
47 $5,615 $26,265
48 $5,776 $24,675
49 $5,942 $23,182
50 $6,113 $21,781
51 $6,289 $20,464
52 $6,471 $19,228
53 $6,658 $18,067
54 $6,850 $16,977
55 $7,049 $15,953
56 $7,253 $14,991
57 $7,463 $14,087
58 $7,680 $13,239
59 $7,903 $12,441
60 $8,133 $11,693
61 $8,370 $10,989
62 $8,614 $10,328
63 $8,865 $9,707
64 $9,124 $9,124
Total at Retirement $2,534,934


So, there you have it. A responsible janitor can retire with $2.534 million by saving and investing 10% of their income. It's worth noting that the amounts are much different if the janitor buys actively managed mutual funds. If he buys them directly and pays 1.44% annual fees, he can rationally expect to achieve the market average return minus 1.44% which is 8.11%. The ending value of his portfolio would be $1.676 million in that case. If he hires a financial advisor to sell him those mutual funds, and the advisor takes another 1%, his ending portfolio value would be $1.259 million. As much as I wanted to demonstrate the power of compounding returns, I also wanted to demonstrate the negative power that ongoing fees and expenses have on our investing activities. One other important aspect of this: if the janitor uses a Roth IRA as the account type for his investments, he will never owe any tax on the $2.5 million. He will have paid taxes up front on the $240,267 he actually saved, but the investment growth of roughly $2.3 million is 100% tax free at the federal level.

By the way, if you're wondering why I'm always talking about rational expectations for returns, please consider the following. The reason that you don't walk into a casino every week when you get your paycheck is that you rationally expect to lose money by doing that. You might possibly make more money, but it's not the rational expectation. It's the same principle with active management. While purchasing active products can potentially lead to outperformance (more money) for those who get lucky, you can rationally expect to lose money out of your portfolio by paying fees and expenses. I'm not saying that you will lose money overall. Overall, you can still expect positive returns on your investments, even when investing in actively managed products. But you can also fully and rationally expect to earn a lot less money by investing in them because you are losing a significant portion of your returns each year to the high fees and expenses you are paying. By choosing active products, you have a roughly 20% chance at outperformance. So 80% of investors wind up with less money by choosing active products. Those are not good odds. You may think you have a method for putting yourself in the 20% group, but you'd be wrong. You probably have a better shot at counting cards.

Another item worth noting: this is an amount of money that the janitor would have 46 years from now. If the inflation assumption of 3% annually turns out to be correct, that would translate this to $650,810 in today's money. Still, if a janitor were retiring with that amount of money today, he would be doing way better than most Americans, even the ones that made a lot more money than the janitor.

One last item of note, the math works such that if the janitor wanted to retire with $5 million, he or she could do so by saving 20% of his gross income. If $7.5 million, then 30% of his gross income, and so on.

I wish someone had showed me this, and really drilled it into me when I was 18. But they didn't... so, I'm going to shout it from the rooftops to anyone who is willing to listen: It pays to start saving and investing early!


Taking advantage of it requires self-restraint, delayed gratification, patience, perseverance, and self-control. Those are all good things God wants to develop in us anyway. Saving and investing throughout your life is one way to help develop those traits, while ensuring that you aren't dependent upon others later on in life. It also allows you to give much more. If it's too late for you to take full advantage of this, start teaching it to your children and grandchildren!

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*NOTE: I included a $7 commission just for good measure. However, if you use Vanguard as your broker, you pay $0.00 in commission on Vanguard ETF trades. There is a $20 annual fee for all Vanguard accounts. But that fee is waived for investors who choose to get their statements delivered via email, as opposed to regular mail. So, with Vanguard, you can literally invest in well diversified passive portfolios with no commissions, no account minimums, and no hidden fees... just the ongoing annual expense of .05% in the case of the S&P 500 index fund, resulting in the rational expectation of higher net returns. 

NOTE: By the way, if you're curious about the math, it's pretty simple. Compounding math works exponentially. If the janitor saves and invests $2,521 at the end of his first year of work, that first year's savings becomes $163,916 by the time he turns 65. The calculation is Terminal Value = $2,521 x 1.095^46 = $163,916. So, that's 1.095 raised to the 46th power, times the amount saved.