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Retirement success factors

By Barbara Whelehan ·
Friday, September 14, 2012
Posted: 5 pm ET

What are the biggest determinants of successful retirement planning?

Recently I wrote about a Putnam Institute study that found deferral rates are more important than most other variables -- including asset allocation, rebalancing and fund selection.

I don't doubt that's true. Deferral rates are something you and I can control. The more we contribute to our retirement plan, the better off we will be when we finally punch in our timecards for the last time.

But all those things matter, too, as do other factors. As my colleague and fellow retirement blogger Jennie Phipps wrote in her most recent post, a 1 percentage point difference in 401(k) fees can amount to a 28 percent difference in your account balance at retirement. According to the example provided in the webcast hosted by the Department of Labor Thursday, by paying 0.5 percent in fees instead of 1.5 percent, an account balance could be $227,000 instead of $163,000, all other things being equal.

Which account balance would you rather own?

Asset allocation matters, too

A couple of years ago, I looked at ways to protect your money and examined two different portfolios. One was a simple 60/40 stock/bond portfolio that invests in the Standard & Poor's 500 index and the Barclays Capital U.S. Aggregate Bond index.

The other was taken from the book "The Gone Fishin' Portfolio" by Alexander Green. It's composed of 10 inexpensive Vanguard funds in the following proportions.

  • Total Stock Market Index (15 percent).
  • Small Cap Index (15 percent).
  • Emerging Markets Index (10 percent).
  • European Index (10 percent).
  • Pacific Index (10 percent).
  • High Yield Corporate (10 percent).
  • Short Term Investment Grade Bonds (10 percent).
  • Inflation Protected Securities (10 percent).
  • REIT Index (5 percent).
  • Precious Metals and Mining Fund (5 percent).

In that analysis, the Gone Fishin' portfolio outperformed the simpler 60/40 portfolio by a few percentage points. I asked Morningstar to do another run, this time looking at those two portfolios, plus one that invests 100 percent only in the S&P 500. I asked for two different time periods -- the last 10 years ending August 31, 2012. And also the period from Jan. 1, 2000, through August 31, 2012, since it captures both bear markets from the first decade of the 21st century. For this calculation, Morningstar ran the data such that the two portfolios with different asset classes were rebalanced annually.

Below are the startling results. Returns shown are annualized. Over both periods, the Gone Fishin' portfolio beats the others by a mile.

Returns of three portfolios in two time periods
  Jan. 1, 2000, to Aug. 31, 2012 Sept. 1, 2002, to Aug. 31, 2012
100% S&P 500 index 1.53% 6.51%
60% stocks/40% bonds 4.1% 6.38%
Gone Fishin' portfolio 8.17% 9.26%


The lesson is that numerous factors contribute to retirement success: asset allocation, diversification, low fees, rebalancing, fund selection and, yes, deferral rates.

Just for kicks, let's look in dollar terms at how much a $100,000 investment in the S&P 500, the 60/40 portfolio and the Gone Fishin' portfolio would have grown over the past 10 years.

Answer: The S&P 500 portfolio would have grown to $187,890; the 60/40 portfolio to $185,609, and the Gone Fishin' portfolio to $242,444.

Which portfolio would you rather own?


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