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 Now, let's extend the concept of The Choice Dilemma™ into our actual retirement accounts. Instead of using the past ten years as above, let's look forward and explore where our retirement accounts will be in 30 years.
Again, most of us who are saving for retirement have our money in market-driven investments, which is fine but we need to understand how averages can mislead us.
Let's assume that the investment that we have our retirement savings in is going to receive an 11.93% return over the next 30 years (that is the average return of the S&P 500 from 1963-1992) and that we are contributing $5,000 annually.
Well, most of us will run the numbers and compute 11.93% each year in order to see where our retirement account will be in 30 years (that's what most financial calculators do).
When we do this (using the numbers above), we'll have a nest egg of $1,332,428, right?
| Year |
Rate |
Invested |
Acct. Value |
| 1 |
11.93% |
$5,000 |
$5,597 |
| 2 |
11.93% |
$5,000 |
$11,861 |
| 3 |
11.93% |
$5,000 |
$18,872 |
| 4 |
11.93% |
$5,000 |
$26,720 |
| 5 |
11.93% |
$5,000 |
$35,504 |
| 6 |
11.93% |
$5,000 |
$45,336 |
| 7 |
11.93% |
$5,000 |
$56,342 |
| 8 |
11.93% |
$5,000 |
$68,660 |
| 9 |
11.93% |
$5,000 |
$82,447 |
| 10 |
11.93% |
$5,000 |
$97,880 |
| 11 |
11.93% |
$5,000 |
$115,153 |
| 12 |
11.93% |
$5,000 |
$134,488 |
| 13 |
11.93% |
$5,000 |
$156,128 |
| 14 |
11.93% |
$5,000 |
$180,351 |
| 15 |
11.93% |
$5,000 |
$207,463 |
| 16 |
11.93% |
$5,000 |
$237,810 |
| 17 |
11.93% |
$5,000 |
$271,778 |
| 18 |
11.93% |
$5,000 |
$309,797 |
| 19 |
11.93% |
$5,000 |
$352,352 |
| 20 |
11.93% |
$5,000 |
$399,985 |
| 21 |
11.93% |
$5,000 |
$453,299 |
| 22 |
11.93% |
$5,000 |
$512,974 |
| 23 |
11.93% |
$5,000 |
$579,769 |
| 24 |
11.93% |
$5,000 |
$654,531 |
| 25 |
11.93% |
$5,000 |
$738,214 |
| 26 |
11.93% |
$5,000 |
$831,879 |
| 27 |
11.93% |
$5,000 |
$936,719 |
| 28 |
11.93% |
$5,000 |
$1,054,066 |
| 29 |
11.93% |
$5,000 |
$1,185,412 |
| 30 |
11.93% |
$5,000 |
$1,332,428 |
| For illustrative purposes only. Not indicative of individual results. Assumes reinvestment of dividends and no effects of fees and taxes. |
Not necessarily.
Again, we have to remember that averages are misleading and that for every loss we need an even greater gain in the market.
Let's use the actual returns for the S&P 500 from 1963-1992 and run the numbers again.
Although the market produced an average return of 11.93%, the actual return was only 11.53%, and we now only have $1,228,640.
| Year |
Rate |
Invested |
Acct. Value |
| 1 |
22.80% |
$5,000 |
$6,140 |
| 2 |
16.50% |
$5,000 |
$12,978 |
| 3 |
12.40% |
$5,000 |
$20,207 |
| 4 |
-10.10% |
$5,000 |
$22,661 |
| 5 |
24.00% |
$5,000 |
$34,300 |
| 6 |
11.10% |
$5,000 |
$43,663 |
| 7 |
-8.50% |
$5,000 |
$44,526 |
| 8 |
3.90% |
$5,000 |
$51,458 |
| 9 |
14.30% |
$5,000 |
$64,531 |
| 10 |
19.00% |
$5,000 |
$82,742 |
| 11 |
-14.60% |
$5,000 |
$74,932 |
| 12 |
26.50% |
$5,000 |
$58,750 |
| 13 |
37.20% |
$5,000 |
$87,465 |
| 14 |
24.00% |
$5,000 |
$114,656 |
| 15 |
-7.20% |
$5,000 |
$111,041 |
| 16 |
6.50% |
$5,000 |
$123,584 |
| 17 |
18.60% |
$5,000 |
$152,500 |
| 18 |
32.30% |
$5,000 |
$208,373 |
| 19 |
-5.00% |
$5,000 |
$202,704 |
| 20 |
21.50% |
$5,000 |
$252,361 |
| 21 |
22.60% |
$5,000 |
$315,524 |
| 22 |
6.30% |
$5,000 |
$340,717 |
| 23 |
31.70% |
$5,000 |
$455,310 |
| 24 |
16.60% |
$5,000 |
$536,721 |
| 25 |
5.30% |
$5,000 |
$570,432 |
| 26 |
16.60% |
$5,000 |
$670,954 |
| 27 |
31.60% |
$5,000 |
$889,555 |
| 28 |
-3.10% |
$5,000 |
$866,824 |
| 29 |
30.40% |
$5,000 |
$1,136,859 |
| 30 |
7.60% |
$5,000 |
$1,228,640 |
| For illustrative purposes only. Not indicative of individual results. Assumes reinvestment of dividends and no effects of fees and taxes. |
Somehow, we've lost over $100,000.
We've got to understand the actual return of the market as opposed to the average return.
Averages Can Be Misleading
Lesson 1
The Choice Dilemma™
Are you making the right investment decisions by looking at market averages?
Lesson 2
The Glass Ceiling™
Find out how average vs. actual return can affect your retirement savings.
Lesson 3
The Retirement Myth™
Are you prepared to live off of only 4% of your retirement savings? You may have to.
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