Most people when they think about investment portfolios and retirement are concerned with the rate of return of the portfolio. How much does it earn every year, how much will it grow over time, is it matching or beating the market (i.e. the performance of a broad stock market index)? While these are reasonable questions to ask, they miss an important point. What matters is not how much your portfolio is returning against the market, or abstractly in a vacuum, but how much your portfolio returns compared to how much income you need it to generate in retirement. This number will vary, because each person's lifestyle, goals, and unique family, tax, and legal situations are different. It is known as the withdrawal burden.
You can also look at this concept as a question of how much pressure you are putting on your investments to achieve your required rate of return. Imagine two investors with the exact same $2 million portfolio, invested in exactly the same way. One investor needs to withdraw $40,000 per year, however, while the other investor needs $180,000 per year. Who's taking more risk in this situation? Remember, the investments are identical. However the second investor is placing a much higher burden on his portfolio and is more likely to draw down the value of his portfolio more quickly, especially in years where market returns are soft.
This example highligths an important point about investing. As Matt says, it's not about the account balances, it's about the demands placed on those account balances. Looking at retirement investing through this lens helps you better understand what job your portfolio needs to do for you. In some cases, you may need to be more conservative with your investment choices; however, you may discover that you can, and should, be more aggressive with your investments so that you can capture more growth over your investment horizon.
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This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.
All indices are unmanaged and investors cannot invest directly into an index.
Investments in target-date funds are subject to the risks of their underlying holdings. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative investments based on its respective target date. The performance of an investment in a target-date fund is not guaranteed at any time, including on or after the target date.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
Exchange-traded funds (ETFs) are subject to market volatility, including
the risks of their underlying investments. They are not individually redeemable from the fund and are bought and sold at the current market price, which may be above or below their net asset value.
Aug 18 20268 mins