2. Put 25% into small-cap value: In the second option, Jessica has a good shot at a pre-retirement return of 9.5%, a big boost over 40 years. (I base this on the assumption of a 12% long-term return on the small-cap value part of her portfolio.)
She’ll have $1.93 million when she retires, and her first annual withdrawal will be $77,213 — around $25,000 more than she would get with the 100% target-fund option. Assuming her after-retirement return is 7%, Jessica’s total of 25 payouts will be just shy of $3 million, and she’ll leave an estate with a value approaching $4 million.
3. Put 40% into small-cap value: If Jessica takes the third option, she will do considerably better. Her annualized return could be 10.2% and her portfolio value at retirement could be $2.31 million.
She will start her first year of retirement with $92,454. Assuming she gets 7% after-retirement returns and takes out 4% a year, 25 years of withdrawals will total $3.58 million, leaving an end-of-life estate worth $4.5 million.
The last line of the table below shows that her total lifetime return (withdrawals plus her estate) is more than twice as great if she chooses to invest 40% in small-cap value starting when she’s young.
These scenarios are not perfect, and probable inflation will mean Jessica won’t be as flush as the numbers might suggest.
Assuming long-term inflation of 3%, that first-year distribution of $51,811 would be worth $15,321 in today’s dollars. (Still, that’s more than three times the real value of the dollars she invested in her first year.)
In the most aggressive scenario I’ve outlined, her first-year distribution would be worth $27,339 in today’s dollars, and her presumed end-of-life estate $668,281.