Tuesday, September 17, 2013

When building a 401(k) balance, what's most important?

Several years ago, I co-authored a paper linked here entitled Retirement Success: A Surprising look into the factors that Drive Positive Outcomes -->


When we authored that paper, we were attempting to quantify and set priorities towards all of the factors contributing to a participant's income replacement.  Intuitively, we knew Savings Rate would be the most important, but didn't know to what degree and how that would compare to investment quality, asset allocation and risk.  The paper did confirm that Savings Rate is worth roughly 75% of someone's ability to retire.

Recently, an article was forwarded to me authored by John Rekenthaler entitled 'What Matters Most'.  It can be found on morningstar.com linked here -->


The thought is similar to our paper from several years ago in that it looks specifically at a sample participant and attempts to define what would matter the most to her in order to allow her to retire given her specific set of circumstances.  The list below are the factors considered:

What would help her the most?

1)      Early start: Find a time machine, go back four years, and start her plan at age 38
2)      Higher salary: Get an immediate 25% raise, to $50,000 in annual salary
3)      Salary growth: Increase her salary by 4% annually rather than 3%
4)      Contribution rate: Invest 8% annually instead of 6%
5)      Company match: Receive a 75% company match instead of 50%
6)      Cheaper plan: Switch to Vanguard and pay 0.22% in fund fees rather than 0.72%
7)      Better funds: Own funds that gain 8% per year before expenses*
8)      Retire later: Wait two more years and retire at age 69, not 67

The interesting take on this to me was the reference to which of these factors are within her control and which were not.  The author identifies that three of the items above are in her control; Choosing when to start investing, choosing her contribution rate and choosing when to retire (or the length of her contribution period). The article goes on to demonstrate how most of the other items are mainly out of her control, and confirms the conclusion that we came to earlier which is that it is ALL ABOUT SAVING!!!  

It's a well done article and worth the read.  To the person who emailed it to me, thanks!

No comments:

Post a Comment