Those numbers fall far short of the stratosphere, but they are far better than the projected results from only the target-date fund. And while we’re facing reality, it’s important to note that this is not the whole picture.
It’s highly likely that Jessica will set aside more resources than just the $5,000 I have described. She may have a 401(k) with an employer match. She may have a spouse who also invests.
On one level this is little more than a compound-interest-table exercise. As any mathematician knows, if you make enough assumptions, you can produce amazing hypothetical results.
The numbers in the table below are not facts. We can’t know future inflation, future investment returns, or future economic realities.
But those numbers show that saving and investing methodically over a long period is likely to multiply the real value of each dollar set aside. They show that supplementing a target-date retirement fund can greatly improve an investor’s long-term returns.
|Invested in small-cap value||0||25%||40%|
|Pre-retirement growth rate||8%||9.5%||10.2%|
|Value in 40 years||$1.3 million||$1.93 million||$2.31 million|
|1st year payout||$51,811||$77,213||$92,454|
|Total of 25 annual payouts||$1.71 million||$2.99 million||$3.58 million|
|Value after 65 years||$2.43 million||$3.94 million||$4.5 million|
|Total initial investments||$200,000||$200,000||$200,000|
|Lifetime return||$3.84 million||$7.03 million||$8.41 million|