Assessing Return Requirements - Trust Point
Assessing Return Requirements - Investing Services

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.


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.

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