By Mark Clark
Learn more about Mark at on NerdWallet’s Ask an Advisor.
What rate of return do you have to earn on your savings and investments to be able to retire at your current standard of living and have your money last through your life?
This question causes you to chase returns: Can I make 2% more on my investment? Can I find an investment that doubles my money?
You think about it a lot, but the results are always the same, short of the goal.
I met with a client who makes $120,000 a year and saves about $6,000 a year. We sat down to discuss this question.
The client earns about 6% on their investments, so that ends up being $360 a year in gains on their $6,000 investment.
For this client, saving $6,000 a year and earning 6% was just not going to allow them to reach their retirement goal. So like many others, they thought increasing their rate of return was the answer.
Increasing the target rate of return increases the risk you take on your savings and investments. When we calculated the rate of return necessary for the client to reach their retirement saving goal, they felt the risk of trying to achieve their target was simply not worth it.
What option did we find?
When people find money they are unknowingly and unnecessarily losing and they use these resources correctly, the found assets can have an incredible impact on retirement goals.
Consider the idea of finding an amount that equals 1% of this client’s income after savings. One percent of $114,000 would be $1,140. To get the same amount from investing the $6,000 in savings, the return rate would have to be 19%.
Chasing a return could be much riskier than looking for money in other places. I believe there is more opportunity in avoiding the losses than by picking the winners.
Can you find the holes in your financial bucket?