If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at http://www.rwinvestmentstrategies.com. If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.
Wednesday, September 8, 2010
Yesterday's post was a question of which 3 events would impact an investor's nest egg the most under assumed conditions. The 3 events were: work an additional 2 years, increase savings rate from 8% to 10%, or increase return on assets from 6% to 8%.
Kevin at "Invest it Wisely" first guessed #3 - increase return, but then changed his answer to #2 - increase savings rate. Actually he was right the first time. Before everybody starts tsk tsking and thinking, "yeah, that's what always happens when you change your answer," actually behavioral scientists find that changing answers on tests (better known as second guessing) actually improves scores.
Anyways, for the example, the person will have a nest egg of $420,000 if he doesn't change his behavior. The respective options work as follows (according to "Fiduciary Benchmarks" data):
1. work 2 more years $490,000
2. Increase savings rate from 8% to 10% $540,000
3. Increase return from 6% to 8% $ 560,000.
What if all 3 options are taken? Then the nest egg would more than double to $850,000! It is worth pointing out that working extra years and increasing the savings rate are under the control of the person. For return, he is somewhat at the mercy of the market. It illustrates the importance of asset allocation. From a financial planners point of view, if the so-called "number" required for retirement was $800,000 or so, a bigger allocation to stocks would typically be recommended.