Comparing Three Major Levers You Can Pull On Your Retirement Portfolio

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One of the most popular posts on the Vanguard blog is My one piece of investing advice by Andy Clarke. Let’s start with the following baseline scenario:

  • Investor begins working at 25, but starts saving at age 35.
  • 12% savings rate
  • Moderate asset allocation (50% stocks and 50% bonds)
  • Salary starts at $30,000 but increases with age

Now, imagine there are three “levers” that you could pull in order to try and increase your final savings balance at retirement – asset allocation, savings rate, or time horizon. In each case, everything else in the scenario stays the same.

threedoors3


Which single option do you think has the most impact? Taken from the blog post, the results below are based the median balance found after running Monte Carlo computer simulations based on historical returns.

threedoorsresults

I would look past the absolute values and instead focus on the relative effect of each option. In case you haven’t figured it out, the one piece of investing advice is “save more”. The easiest lever to pull is a more aggressive asset allocation because it doesn’t require the pain of spending less and saving more (though you get more stomach-churning bumps and less reliable results). But here we see that saving just 3% more was equally powerful. If you pulled all three levers, your final balance would have more than doubled!



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Comments

  1. early savings and aggressive investments is extremely important.
    As is distributing the eggs in different baskets.

    I am near $150 K in net-worth which I guess is not too bad for a 29 year old.

  2. The problem is that when you are young saving/investing is usually not a priority. I still regret not investing in my first employers 401k.

  3. I just wish this was emphasized to every high school student. The earlier you start saving, the easier you’ll make things for yourself. So many people don’t save anything in their 20s, but this is exactly when it is most critical to at least put something away to let compounding interest go to work. I think automatic 401k/TSP deductions that you have to opt out of would go a long way in increasing participation in these retirement schemes. Employers who are honestly interested in their employees well being should make it easier to save than to spend.

    • Most places that offer a 401(k) already have automatic enrollment. People can’t understand that delayed gratification is better than instant gratification, especially once you consider the benefits of tax deferral and compounding.

      • I don’t know about automatic enrollment. Couple places I worked, you had to enroll and of course, you could opt out. But nothing was automatic per Se. Nevertheless, delayed gratification is always better since its also “compounded” gratification 😉

      • I don’t know about automatic enrollment. Couple places I worked, you had to enroll and of course, you could opt out. But nothing was automatic per Se. Nevertheless, delayed gratification is always better since its also “compounded” gratification

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