Are you nearing retirement and worried about your portfolio's performance? Do you fear outliving your money? Investment performance anxiety is often hard to talk about for a pre-retiree and can lead to investor dysfunction. This revealing illustration vividly shows that retirement success is about the size of your savings rate when you're in your 50s and 60s! Although your portfolio performance is more important in your 20s and 30s, your savings rate matters more to retirement success as your retirement nears.
A 25-year-old with a $35,000 income that rises annually by 3%, who saves 6% of their income in a tax-deferred retirement plan and averages a 6% portfolio return annually, would accumulate $528,007 at age 65. If the 25-year-old boosts their savings rate to 10%, the retirement account would grow to $880,012 at age 65.
If the 25-year-old with the same income annually saves at the same 6% rate, but earns 10% annually, the account at age 65 would be worth $1,392,758.
Clearly, the extra 4% portfolio return annually boosts the retirement portfolio more for the 25-year-old than boosting the savings rate by 4%.
But look what happens when a 55-year-old is faced with the same dynamic.
A 55-year-old — earning $84,954 today after 3% raises annually since age 25 — who continues to get 3% raises annually, saves at the 6% rate, and earns a 6% portfolio return annually, would have $87,344 in their retirement account at age 65. Boosting their portfolio return annually to 10% would grow the account to $106,961 at age 65. In contrast, boosting the 55-year-old's savings rate to 10% puts the portfolio value at $145,573 at age 65 — a much better result. While pre-retirees often grow anxious about portfolio performance, it's their savings rate that is more influential as retirement nears. Portfolio returns are subject to investment risks, which you do not control. Your savings rate, in contrast, is something you do control. Rather than suffering from investment performance anxiety, it's wise for pre-retirees worried about outliving their money to examine their ability to boost their savings rate.
This article was written by a veteran financial journalist. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results. |