Retirement saving requires key decisions: when to start, how much to save, and where to invest. The investing decision has drawn more attention as government regulators work to open 401(k) plans to alternative assets such as private market investments.

Below, we compare the paths of two hypothetical retirement savers and their outcomes.

A Tale of Two Retirement Savers

Laura and JR are two 25-year-olds newly employed at the same company, in the same role.

Step 1: Deciding to Save

On her first day at work, Laura committed 10% of her $75,000 salary to her 401(k). That earned her company’s 3% annual match (it matches 50% up to 6%), and 13% in total savings. She still had room in her budget for weekends filled with activities.

JR was more worried about now. Rather than putting money into a 401(k) he wouldn’t touch for decades, he enjoyed his $75,000 salary. Five years later, JR began to build his nest egg. He opted for the minimum contribution rate to qualify for the company match, contributing 6% with a 3% match.

Step 2: How to Invest

Laura and JR’s employer offered many investment vehicles, including target-date funds. One invested only in public stocks and bonds; the other kept a 15% allocation to private equity and private credit across the glide path.

Laura preferred the public-only target-date fund for its simplicity and transparency. JR was also drawn to the target-date options and their ease of use. However, he went with the private market option since it promised higher returns, and to make up for his late start. He figured he could quickly recover five years of missed contributions, given that he had 35 years until retirement.

From Earnings Years to Retirement

Laura and JR both rose steadily to senior management positions. Their career progression, and their salaries, stayed in tandem. By the time they were turning 65 and approaching retirement, each was earning $178,620 a year. There had been no changes to their 401(k) contribution rates or their company’s matching formula. As Laura and JR prepared to retire, they reviewed their 401(k)s.

For JR, the target-date fund with private markets had paid off. Over 35 years of investing, the fund delivered an annualized return of 8.9%, compared with 8.4% for the public-only option. This left him with a balance of about $2 million. Combined with Social Security, JR felt that he could enjoy retirement without the risk of outliving his savings.

The public-only TDF underperformed compared with the private markets TDF, but Laura didn’t mind. Over 40 years of investing, her 401(k) account balance grew to more than $3 million. By starting earlier and contributing more she harnessed the power of compounding returns to a much greater extent than JR had.

JR’s private markets sleeve gave him a small edge, but Laura’s decision to start saving earlier and save more made the real difference. Compounding did the rest, turning her steady contributions into a balance far larger than JR’s.

The bottom line: It is far better to focus on how much to save and when to start saving, instead of the whims of the public and private markets.

Behind the Curtain

In illustrating the importance of saving early and saving more, we had to make several assumptions. We assumed that Laura and JR earn the same salary and stay at the same employer for their entire careers, with no breaks in employment. We assumed stocks, bonds, and private markets all delivered the long-term return expectations set by Morningstar Investment Management. It’s not a given that a target-date fund with a 15% allocation to private markets would outperform a similar strategy focused solely on public stocks and bonds, especially after fees.

There is debate about whether private equity funds outperform their public counterparts. A Morningstar analysis concluded that private equity funds are best thought of as another form of active management, where a handful of funds may significantly outperform their peers, but median returns are similar (or worse) to public market funds.

Moreover, private markets present additional challenges for forecasting due to the heterogeneity in the underlying investments. The results should be viewed as more of a best-case scenario for target-date funds with private market exposure.

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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance

Jason Kephart, CFA, is a senior principal, multi-asset strategy ratings, for Morningstar.

Spencer Look is an associate director, retirement studies for Morningstar Investment Management LLC.

Samantha Lamas is a senior behavioral insights researcher for Morningstar.