The 1% Difference


1% Less Return Can Cost Millions in Retirement

Steve's Retirement Projections
Steve has started a new job with a 401k plan. He expects he’ll have to provide for the bulk of his retirement income dollars. Saving in IRAs was difficult, therefore Steve is excited about the automatic salary deduction/reduction feature of his employer’s new 401k.

Steve sat down one evening to project various ‘what ifs’ into an Excel spreadsheet. When he saw that a 1% difference in investment return would cost millions, he figured he’s made a mistake in one of the spreadsheet formulas. He hadn’t. The relentless compounding of 1% over 65 years of the retirement income journey makes the difference.

Steve’s spreadsheet highlights:

Age 30; expects to work 35 years, projects 30 years of retirement

  • Earns $40,000/year, expects 4% annual increases
  • 10% of earnings contributed to 401k account (to reach 75% of earnings replacement)
  • Has $10,000 accumulated in IRA account


8% Average Investment Return

  • $1,320,227 Portfolio value at retirement
  • $79,214 Initial year withdrawal from portfolio (6% of portfolio value); increase withdrawal dollars 3% each year. $79,214 would be 50% of $157,844 earnings @ retirement.
  • $3,768,622 Total withdrawals over 30 years
  • $704,585 Portfolio value after 30 years of withdrawals
  • $4,473,207 Total of withdrawals & portfolio value after 30 years


9% Average Investment Return

  • $1,635,923 Portfolio value at retirement
  • $98,155 Initial year withdrawal from portfolio (6% of portfolio value); increase withdrawal dollars (not %) 3% each year. $98,155 would be 62% of $157,844 earnings @ retirement.
  • $4,669,783 Total withdrawals over 30 years
  • $3,172,781 Portfolio value after 30 years of withdrawals
  • $7,842,564 Total of withdrawals & portfolio value after 30 years.


Bottom Line: 9% Return’s Total is $3,369,357 Greater than 8% Return Total.
Over 65 years there will be dozens of critical decisions with the potential to throw Steve’s retirement portfolio off track—costing the portfolio several 1%s. Steve’s conclusion (with a little help from a friend) is that the antidote to speculative decisionmaking is diversifiing his portfolio across the total market. He’s invested into a Global Asset-Class Portfolio with a Normal (60%) allocation to equities, with an expected 9% return.