Investment Help

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Saturday, July 5, 2014

A Tipping Point in Your Savings

 An important milestone in saving for your retirement is when your "nest egg" reaches 2X your salary.  This is nicely presented in Your Money Ratios by Charles Farrell, one of my favorite books mentioned in yesterday's post "The Four Investment Books I Recommend Most Often."

The milestone works like this.  Assume you make $80,000/year and are saving 15% per year.  This equals $12,000/year you are socking away.  Assume, also, that you have a nest egg of $160,000 built up, equal to 2X your salary.  Then, if you earn 4.5% above the rate of inflation and assume that inflation is 3%, you are earning 7.5% for the year.  On $160,000, a 7.5% return amounts to $12,000.

Thus, at this milestone of having a nest egg built up of twice your salary, you are adding the same amount to your nest egg through investment performance as you are from paycheck contributions.

As a point of reference, a well-diversified portfolio comprised of 65% stocks/35% bonds achieved an average annualized return of 8.3% over the 20 years ended 12/31/13.

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