Playing with historical data leads to several observations that may be relevant for anyone considering long‑term investing on their own, for example building a pension outside of traditional pension funds.
Data and Methodology
The analysis is based on the following data sources:
- S&P 500 and Nasdaq price data from Yahoo Finance (from 1985 onward)
- S&P 500 price data from Stooq (from 1940 onward)
- S&P 500 dividend data from DataHub (datahub.io/core/s-and-p-500)
- Calculation scripts generated with the help of perplexity.ai
The core idea is straightforward: different people start investing in different years, contribute the same fixed amount every month, and stop after either 20 or 30 years. The question is what kind of annualized returns history actually delivered for such investors.
Scenario 1: Investing for 20 Years
In this scenario, investors plan to invest for exactly 20 years and then withdraw the full accumulated amount.
Each investor contributes the same fixed sum every month. The only difference is the starting year: for example, 1985–2004, 1986–2005, 1987–2006, and so on.
Key observations
- Assuming that investing for 20 years will automatically result in the long‑term average index return is often misleading.
- There are extended historical periods where realized 20‑year returns are well below the long‑term average.
- In roughly half of all historical 20‑year periods, the S&P 500 failed to reach an annualized return of 8% (investing from 1985).
- Even Nasdaq’s 20‑year returns frequently did not reach 12%.
Interpretation: A 45‑year‑old investor planning to invest in the S&P 500 for 20 years and then withdraw everything could easily end up with a long‑run return closer to 6% rather than the commonly expected 8–10%.
Scenario 2: Investing for 30 Years
This scenario extends the investment horizon to 30 years. Investors again contribute a fixed monthly amount, but now withdrawals occur only after three decades (for example, 1985–2014, 1986–2015, etc.).
What changes with a longer horizon?
- Over 30‑year horizons, the probability of achieving something close to the long‑term index average improves.
- Even so, only about 1 in 10 historical 30‑year S&P 500 investment periods delivered more than a 10% annualized return(looking data from 1985).
- Nasdaq performs slightly better, but still falls short of consistently matching the often‑quoted 14% average return.
Scenario 3: Invest at Least 20 Years, Exit Only at a Target Return
In this scenario, the strategy changes. The investor commits to investing for a minimum of 20 years and continues longer if necessary. Withdrawals occur only when:
- The S&P 500 reaches a 10% annualized return, or
- Nasdaq reaches at least a 13.3% annualized return.
This roughly corresponds to a situation where someone is close to retirement, plans to retire at a given age, but is willing to work a few extra years if market conditions are unfavorable.
Results
- Achieving a 10% annualized return on the S&P 500 often requires more than 25 years of investing, and in some cases over 33 years.
- Reaching 13.3% on Nasdaq can take up to 30 years, with an average closer to 23 years.
- In certain periods, it was actually faster to reach 13% on Nasdaq than 10% on the S&P 500, despite Nasdaq’s higher volatility.
Scenario 4: Minimum 30 Years, Exit Only at a Target Return
This scenario mirrors Scenario 3, but the minimum investment period is increased to 30 years
The question becomes: how much longer, if at all, does one need to invest to reach 10% on the S&P 500 or 13.3% on Nasdaq?
Left picture result for 20y investment (like in Scenario3) and result for 30y investments
Observations
- In some historical cases, achieving a 10% S&P 500 return required up to six additional years beyond the initial 30.
- For Nasdaq, the maximum additional period needed to reach 13.3% was about 2.5 years.
Additional Notes
Several secondary observations emerge from the data:
- An “All world” strategy historically implies a realistic return ceiling that is roughly 1–2 percentage points lower than that of the S&P 500, with similar timing patterns.
- Lithuanian pension funds typically invest into “all world stocks” and gradually reduce stocks part from around age 47. This can lead to situations where, during a market drawdown, equity exposure is reduced precisely when long‑term recovery potential is highest.
- In such cases, it may be worth evaluating whether switching to a “younger” pension fund with higher stock exposure makes sense, allowing continued participation in market recoveries rather than locking in losses.
Overall, investing is rarely as simple as allocating money to “some fund” once per year or monthly. What you invest in matters, and riskier strategies can sometimes be more effective over the long run by reaching target outcomes faster.
How Long Does It Take to Reach 10% With 20–30 Years of Saving?
Looking at historical data over roughly 70 years, there were only a limited number of starting years where investing for a full 30-year period resulted in a final annualized return of 10%.
Initially, Scenario 4 seemed to confirm a clear rule: starting ten years earlier lets you retire, on average, 2–3 years sooner—and in the worst cases, 7–8 years sooner. However, the data reveals a nuance: sometimes, a shorter investment period reached the 10% target faster. The reason is that very long horizons often encompass multiple major crises; recovering from several deep drawdowns can significantly slow the progress toward higher annualized returns.
This illustrates that time alone does not guarantee superior outcomes; the sequence of market events during the investment period matters just as much as its length.
A Note on Dividends
Returns were first calculated without dividends and then adjusted by adding a fixed dividend contribution: approximately 2% for the S&P 500 and 1.5% for Nasdaq.
- Dividends improve results modestly but do not fundamentally change the conclusions.
- For Lithuanian investors, dividends from distributing ETFs are further reduced each year by personal income tax.
- The dividend assumptions used here are relatively optimistic and should be treated as such.
Closing Thoughts
Finally, the analysis examined the range of outcomes investors could historically expect over 20–30 year horizons when starting in different years, including the dividend assumptions discussed earlier.
The results show a wide dispersion of outcomes even over such long periods. Depending on the starting point, investors with identical contribution patterns and identical strategies ended up with materially different annualized returns. While dividends improved results somewhat, they did not eliminate the impact of timing and market cycles.
Long-term investing is simple in theory but complex in reality. Returns are not delivered as an average; they are earned through specific, sometimes unforgiving, historical sequences. Your most powerful tools are an early start, strategic flexibility, and expectations grounded in data, not optimism.
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Disclaimer: The information provided in this post is for general informational purposes only and should not be construed as investment advice. It is not intended to be used as a basis for any investment decisions. The views expressed are solely those of the author and do not constitute an offer or solicitation to buy or sell any financial instruments. The author is not a licensed investment advisor and does not provide personalized investment recommendations. Readers should consult with a qualified financial professional before making any investment decisions.