im 27, and have had my pension plan for 6 years. how much should i expect to be in it now.?

Question

Also, what is a good rate of return. mine is 7.98%. just curious how my portfolio compares, and if i need to adjust it. thanks

Answer 1

It depends on your pension plan. How much have you been contributing? How much does your company put in? Is it a defined benefit plan or a contribution plan?

There is not enough info to project a balance. however, after 8 years, you should expect to have almost 1 years pay in there. ( Assuming 10% per year) Are you on track for that?

At your age, you should be targeting minimum returns of 11-12% per year on your retirement funds.

Answer 2

good question and just enough data to be helpful ...

the federal government is borrowing long term money at 4.75% these days.

since your retirement is some 40 years away, I think 8% return is far too low.

over the long run, the stock market, as measured by the SP500 index has, in the past, returned 5 to 8 percent over the rate at which the government borrows money. [source: "Stocks, Bonds, Bills, and Inflation" -- an annual publication found in reference section of college libraries].

let's raise your target return to 12.25%, before consideration of inflation.

**
if inflation is 3% and your stated return is 12.25%, you'd then get 9% real return

under the rule of 72, this means that invested capital doubles every 8 years.

you have 40 years to go, so that is 5 doubling periods.

since the money goes in over time, instead of all at the beginning, the growth in the 1st doubling period will be only 1/2 the amount expected.

it follows that the accumulated amounts, at the end of each doubling period [each 8 years], will then be

1.5
4.5
10.5
22.5
46.5

times the total amount invested in each doubling period [which is 8 years long].

***
now, suppose your "i'll be comfortable with that" goal for when you are 68 is 1 million dollars capital in today's purchasing power.

it follows that each deposit over eight years is 1 million divided by 46.5 or about 21,500. it also follows that your annual investment needs to be about 21,500 divided by 8 or 2700 USD per year.

****NOTE: this has to increase each year by the rate of inflation [3% assumed above]. FAIL to do this and you'll not get the target result!!

If your pension has anything in it today, you'll be ok if you fix what you're investing in and contributions are 2700 a year or more -- and if 1 million in current value is enough.

WARNING: taking too little risk will lead you to working at Wal-Mart when you're 85!! [So will taking too much risk, as the high flyers who bet on Enron discovered.]

that 1 million should provide 90,000 a year present purchasing power [the same 9% after inflation] every year while you're retired. forever. even if you live to be 105. and your heirs will get the 1 million then.

who needs Social Security?


:-)


comments from readers invited.
I have no products to sell, so no fear of me is needed.

Answer 3

Spock is right on the nose here. At your age, you should have a heavy weight of investments in moderate to aggressive funds. As you get older, you will need to shift gradually towards less risky funds. Time is on your side.

12% is the standard goal for investment bankers and financial planners. Rich people will fire their experts if their return is less than this.

Make sure you contribute as much as you possibly can to the maximum level that your employer will match... even though your fund is only returning 8%, you're actually getting 100% return anytime your employer is matching you... think about that.

Also, are you a home owner? Get that house working for you and help you with taxes? caseycasperson.com

Answer 4

That rate is low for anyone. Six years takes you back to the middle of the bear market so you didn't start out at a great time. You can easily avoid the next correction by learning exactly when to move into a money market. Check out www.justmanageit.com and see how easy this is. It will also more that rate up passed 13%.

Answer 5

The long term average for the US stock market is 12%. 8% is less than an average mutual fund. With no clue about your income, we can't comment on how much you should have total.

Edit: I just checked my 401(k) The average rate of return for the last 3 years is 13%.