Do you know your weight? How about your cholesterol level? If you’re concerned about living a long and healthy life, you probably know both answers and are working to keep them in a healthy range.
Now what about the net investment return on your retirement savings? Do you know what it was for 2017? How about so far this year? Are your returns in a healthy range? If you know the answers to your health questions but not your retirement savings, you may end up living a long life only to find yourself living your later years in poverty.
Figuring out your investment return can be challenging if your account custodian doesn’t provide the number for you. It’s not too hard if you have some basic math skills and you haven’t added or withdrawn from the account over a period, but the calculations get tough when you start adding savings. Even if you get returns on some of your accounts, you may not have a good picture of your overall return unless you get them all and can do a weighted average calculation.
Once you know your numbers, you need to determine if your net overall return is in the healthy range. Unlike weight or cholesterol ranges, the range of good returns varies with the investment markets. A 10% net return for 2017 wasn’t very good (unless your portfolio was very conservatively invested). A 10% return so far in 2018 would be outstanding. Your healthy range depends on your objectives and portfolio composition.
What was your rate of return assumption in your retirement plan? You do have a plan, right? If you assumed a 7%, 8%, or 9% investment return and don’t have a good idea of your investment results, you may be in trouble. According to DALBAR, the average mutual fund investor using an asset allocation strategy earned an average of 2.58% annually over the past 20 years, barely ahead of inflation—before taxes. You may just figure that your investment results are about average, but that may be way less than you’ll need to make your retirement plan work out.
Your investment portfolio asset allocation should align with your retirement plan investment return assumption. You can’t be aggressive with the assumption and then conservative with your asset allocation. If you’ve assumed a 6-7% investment return, then your portfolio should be heavily invested in stock funds and you’ll want a benchmark similar to your overall portfolio allocation. You can use indexes like the S&P 500, but if your portfolio is more broadly diversified into bonds, real estate, or international investments, then you’ll need to create a weighted average of a few indexes. Another option is to use the return of the average asset allocation mutual fund from Morningstar. They currently offer daily updates on a range of categories from 15-30% Equity (stocks) to 85%+ Equity along with a World Allocation for globally diversified portfolios.
If you’re not getting your net investment return on your retirement savings from your advisor, it’s like not getting your cholesterol figures from your doctor. Your portfolio may be really sick and you don’t even know it.
At Vintage, we update our client’s retirement plans regularly and they can even check their progress online anytime. We also provide their net rate of return on their entire portfolio, including 401(k) plans, updated every day. It’s easy to see how the plan is working out and if the portfolio return is in the current healthy range.