The one rate that is more important than return

Investors have a laser focus on returns, which makes sense. Making the most of what you have saved means finding a high-return option in an appropriate risk and expense category. But there’s a rate that’s far more crucial to your rate of return, when it comes to retiring with the most resources possible.

Your ultimate success is most driven by your savings rate. Your contribution to consumption ratio makes an enormous impact.

Yes, yes, we know you’ve heard “save more.” But the math is stunning, especially for younger investors, and it’s clear that investment returns take a back seat to maximizing contributions. A recent study ran numerous models and found that saving more was the single-most powerful change generation X and millennials can make to improve their outcomes at retirement.

This means putting away a significant piece of your income — at least 15% — each and every year. And if it goes up next year, consider earmarking half of every increase for investment.

You also don’t want to make the mistake of limiting your thinking to income. Did you get a big commission or bonus this year? Did you make an unexpected profit selling a house? Did you receive an inheritance? As you and your family weigh all the ways you might consume that money (a new house, a well-deserved trip), be sure to discuss the possibility of investing a big piece for the future. Consider taking 20 percent, for example, and then calculate its value at age 60 and 70 (there are lots of online calculators that can do this easily). Then make this potential investment part of your discussions and decision making.

Do you spend a lot of time trying to maximize your portfolio’s rate of return? Why not carve out some time to maximize your rate of contribution? You might be surprised at the difference it can make for your future.

At Duncan Williams Asset Management, we love to help investors plan for and achieve the futures they want. Give us a call – we’d love to answer any questions you have about managing your finances and assets.