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Thursday, May 08, 2008

The returns you get on your money matter...A LOT!!!

Although I understand clearly the argument for low cost index funds, especially for more risk averse people, I want to briefly make the argument for going after above average returns.

Why? Because it can have a HUGE impact on your quality of life. Getting above average returns can greatly improve your safety and security both before and during retirement.

Let me give you some a examples to clearly illustrate my point.

Suppose Bob starts saving at 30, retires at 65 and dies at 95. Also, suppose he saves $100 a month from the time he's 30 until he reaches 65. Finally, suppose he gets 7% returns from age 30 to 95. How much will Bob have to live on? Around $13,400 a year from the time he's 65 until he dies at 95.

Now, suppose Fred does the exact same thing as Bob, except he gets 8% returns from 30 to 95--only 1% better than Bob! Fred will have around $18,400 a year to live on from the time he's 65 until he dies at 95. That's 37% more a year to live on!

Using slightly different savings inputs, that's the difference between having $50,000 a year in retirement versus having $68,500 a year! That's HUGE!!!

You can plug any numbers you want to in the scenario above, and you'll get the same general answer. Getting better returns--even mere 1% better returns--can hugely raise your standard of living in retirement, thus giving you more peace of mind, safety and security.

More provocatively, let's suppose you don't know when you're going to die--most people don't! How long will your money last when your retire?

Let's use the same numbers above, except let's assume both Bob and Fred don't know when they are going to die, so they spend $17,500 a year. How long will their money last if Bob gets 7% returns and Fred gets 8% returns? Bob's money will last 17 years--he'll run out of money at age 82. Fred's money will last 38 years--he'll have money until 103 years old!

Can you imagine running out of money at 82 versus having enough to last to 103? That's a huge change in safety and security!

My point here is not that everyone should try to get above average returns. My point is that getting above average returns may REALLY be worth it if you have the tolerance and ability to go after above average returns.

I've been beating the market, after fees, by around 3.5% a year for the past 12 years (past results are no guarantee of future performance). Want to guess what my retirement projections look like? Want to guess how much peace of mind I have?

If you have the right temperament and the right financial situation to go after above average returns, it can have a huge impact on your current and future lifestyle. In my opinion, it's well worth going after.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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