Without a doubt, the biggest mistake investor's make is violating "The Golden Rule of Investing." The error is not tied to selecting poor stocks, making bad market timing decisions, or even mis-allocating assets. Sure, those mistakes hurt portfolio performance, but it is inadequate saving early in life that is the culprit. Failure to save early places incredible pressure on economic life during the retirement years. While the saving rate in America is increasing due to the recent recession, our savings rate is still far below many countries. I recall our Chinese guide telling us, "In China we save and in America you spend." Of course she was quite pleased we were spending our dollars in China as tourists.
What I've done below is to take a generic portfolio made up of ten ETFs that cover the U. S. equities market (VTI, VO, and VB), the developed international market (VEU), emerging markets (VWO), REITs (VNQ), and several bond and income oriented vehicles (BND, TLT, TIP, and HYG). To keep things simple, I allocated 10% to each ETF. The Return/Risk ratio is adequate at 0.55. The Diversification Metric is on the low side at 25%. In other words, we can come up with a stronger portfolio, but for now let's ride with this basic portfolio.
Scroll down the page to view how this portfolio will play out with a 45-yr. old investor who has saved $500,000, and plans to retire in 2032 at age 66. Inflation is projected to be 3.5%/yr. over the next 21 years and into retirement. This individual wants to be able to pull $70,000 per year out of the retirement portfolio, likely a high figure assuming social security and some sort of pension is part of the retirement income package. This investor continues to save $6,000 per year or $500 per month until retirement. With these assumptions and the following portfolio, what does a Monte Carlo project?