Assessing Return Requirements | Trust Point
Click Here to Select Your Login

Assessing Return Requirements

By
Updated November 8, 2017

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.

One of the first steps in any investment program is to set a long-term goal. In establishing this goal, the investor needs to:

  • identify the purpose of the future money
  • determine the savings rate
  • determine the rate of return needed to achieve the established goal
  • establish the time frame available to meet the goal

Some reasons for investing include college education, purchase of a house, or gift to a relative or charity. The most common reason, however, is retirement. Therefore, we will use retirement as the long-term goal for explanation purposes.

One approach is to estimate your retirement income needs and work the numbers backward to arrive at the program. For example, let’s assume Investor A is expected to retire in 20 years and estimates that a retirement income of $40,000 is needed. However, that is in today’s dollars, and this figure needs to be adjusted upwards for inflation. Let’s assume the inflation rate remains at a level of 3% over the next 20 years. Taking inflation into consideration, the needed retirement income has just grown to $72,245.

Now that we have an income target, we can calculate the amount of money needed for investment to support that target. Let’s assume that Investor A expects that a 5% yield from the invested dollars is achievable, and thus will spend 5% of the invested dollars each year to obtain $72,245. By again using reverse math, we calculate that to support this income level, an investment pool of $1,444,900 is needed. This seems like a large amount, but we now can break this down to a savings goal and an investment goal.

Investor A has already accumulated $100,000 in retirement monies consisting of 401K plans and IRA’s. If this investor doesn’t save any additional money from this point forward, it would take a substantial annual return of 14.3% to achieve the goal. Long term, stocks have only returned 11% to 12%, so it seems that Investor A definitely needs to save some additional money.

Let’s say that Investor A plans to continue a saving 15% of his current salary, or $6000 per year. With this plan, the return requirement drops to a more obtainable 12.2%, but it’s still a plan that requires fairly aggressive investing, and, of course, higher risk.

As one can see, this process is complicated. Key assumptions can have a dramatic impact on the optimal investment program. There are a number of retirement calculators on the web that are designed to assist investors in determining investment needs.

It is important to note that each investor’s situation is different. For a more accurate assessment, contact Trust Point for a personal appointment today! Call 800-658-9474.

The articles and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual.

Share This Post

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.