Tips on Maximizing Returns on Your Retirement Fund
- Tips on Maximizing Returns on Your Retirement Fund
- CASE STUDY : Jane vs. John
Retirement Fund Strategy 1: Get maximum employer match
Most employers provide a match to your 401(k) contributions. For example, if an employer matches dollar-for-dollar for your contribution, up to 6% of your salary, if you make $50,000 a year, you can contribute $3,000 in a year toward your retirement fund, and your employer will also add $3,000 to your 401k account. Please note that some employers have a vesting schedule so the employer contribution does not become ‘yours’ straight away, you might have to work a certain number of years for the employer contribution to vest. However, your contributions are ‘yours’ no matter what the vesting scheme of the employer is.
Retirement Fund Strategy 2: Start Investing Early
I cannot emphasize enough the benefits of starting your investment journey early. Time is your friend, and starting early can create the magic of compounding on your fund.
Retirement Fund Strategy 3: Keep an Eye on the Fund Management Fees (Expense Ratio)
Most funds do not outperform markets. By markets, I mean broad market indexes such as S&P 500 or the Russell 2000. So, if the fund is not generating more returns than the market, you should not be paying a premium for that. Of course, some actively managed funds give positive abnormal returns (more than broad market returns), you shouldn’t mind paying a premium for extra returns. So, for example, if fund ABCXYZ consistently returns 12% annually and charges 1% fund management fees, your effective return is 11%, which is higher than the avg. market return (say 8%).
Having said that, most funds actually do not outperform the market, so make sure you’re not overpaying to get market returns or even worse returns.
CASE STUDY : Jane vs. John
Scenario 1: Jane’s retirement fund strategy
Jane has a salary of $80,000 and she starts investing at age 20, in a low-cost index fund (management fee 0.08%) that tracks the market. Her employer matches her contribution dollar for dollar, up to 6% of her salary. So, effectively, Jane puts $4,800 and the employer puts $4,800 i.e. a total of $9,600 is added to Jane’s retirement account every year.
Assumption: The index fund returns 8% per year, on average.
Please note this is a simplified model that assumes a constant salary of $80,000. In real life you’d expect the salary to increase every year.
By age 65, Jane’s retirement account would have $4 million in it.
Scenario 2: John’s retirement fund strategy
John has a salary of $80,000 (same as Jane’s) and he starts investing at age 25. John is not careful in picking his investment funds, and puts all his money in a fund that doesn’t beat the market (i.e. returns 8% per year), but charges 1% as a fund management fee.
John’s employer also matches his contribution dollar for dollar, up to 6% of his salary. So, effectively, John puts $4,800 and employer puts $4,800 i.e. a total of $9,600 is added to John’s retirement account every year
By age 65, John’s retirement account would have just $2.1 million in it.
So, where did John miss the trick to end up 50% less than what Jane would have at retirement, despite making the same contributions to his retirement account?
John made two mistakes:
- He started late, not by much, just 5 years late.
- He didn’t pay attention to the fund management fee
Avoid these two mistakes with your retirement fund!
More from the Blog
Stocks, ETFs, Mutual Funds, Bitcoins
Alternative Investing, Dividends, Stock Options, Credit Cards
Home | BLOG | WebStories
Student Loan Payoff Calculator | Mortgage Payoff Calculator
CAGR Calculator | Reverse CAGR Calculator | NPV Calculator | IRR Calculator