Getting Wealthy Part 2- Portfolio Returns

Getting Wealthy Part 2- Portfolio Returns

September 18, 2023

Portfolio and Returns- Why do we invest the way we do?

Let’s go straight to the heart of financial planning, to help us understand the “why” of our investment portfolio.

Retirement income planning has a basic formula:

  1. Estimate your expected living expenses in retirement
  2. List expected retirement income: social security, rents, pensions, etc.
  3. Calculate the gap between the two: let’s say $100,000 annual expenses (factor in cost of living increases) - $65,000 in social security= an annual deficit of $45,000.
  4. To use the rule of thumb for sustainable annual withdrawals, $45,000 is 4% of =


This is an example of a savings goal or asset base.  If it isn’t reached by retirement, some adjustments to spending, retirement age, or investment strategy may be necessary.

In a previous post we looked at how $7,500 inflated and saved annually for 25 years translated to roughly $400,000 saved out of pocket- the investment component grew those dollars to the ~$1 million dollar mark.

At this point it gets personal- do you want to swing for the fence and maximize your asset base to cover growing and unexpected costs?  Do you prefer to play it safe and aim for just enough annual return to get by? 

*By investment return I mean growth (capital appreciation) plus income (dividends and interest) 

 Advisors encourage and guide younger people to save and invest as aggressively as life allows during the working years.  Too often we see people struggling in retirement with fewer options and more stress because they didn’t save or invest sufficiently.  Enjoying a life of financial freedom is the goal!

Let’s look at the purpose of an investment strategy- this is where many folks get distracted by individual investment selection and market timing that can prevent them from seeing the forest for the trees.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” Benjamin Graham

Based on your future required asset base, amount you’re able to save, and number of years until retirement, we need one more number to solve the equation: an annualized, average investment return.

Depending on your personal equation, the return you should aim for may be 5,6,8, or 10%.  If you need a higher return, we should reevaluate some of the other numbers in the equation - we must keep expectations reasonable and in line with historical numbers. 

So why wouldn’t we just put it all in a S&P 500 index fund?  Historical returns have averaged 10% over long periods.  We could- but remember, high return goes hand in hand with high risk.  Risk in this case means volatility- higher highs and lower lows. 

“All financial success comes from acting on a plan.  A lot of financial failure comes from reacting to the market.” Nick Murray

Is that why do we own 6-8 different funds, representing other asset classes as well as the 500 largest US companies?

Yes- my goal is to keep you invested according to your plan. 

Let’s look at the S&P 500 during a specific period: the early 2000s.  You think the market has been frustrating, moving sideways the last two years- the early 2000s was nearly considered a lost decade for US stocks. 

You know what often did better during this period?  Foreign stocks as measured by the MSCI EAFE- Europe, Australasia, and Far East emerging and developed countries.

We can’t predict when cycles will turn, so we stay diversified among US and foreign companies, large and small companies, and all the various sectors of the economy.  It may not be the highest possible return in any given year, but we’re aiming for averages over your time horizon. 

Not even the most sophisticated analysts attempt to predict the future, financial journalism is rarely helpful, so there’s no reason to give yourself brain damage trying to chase hot trends or time the market.

A portfolio you can stick with at all times is preferable to a high flyer you may bail out of during a tough year.

Adding bonds and cash to the mix aims to reduce volatility further, but we must select the right mix of stocks and bonds that have historically provided the returns that you need to REACH your required asset base and MAINTAIN withdrawals in retirement without depleting it.

In a future post, we’ll examine how to stay wealthy:  the role of dividends, interest, and total returns in providing a rising income during the retirement years.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.

Securities and Retirement Plan Consulting Program services offered through LPL Financial, a

Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth Management LLC, a Registered Investment Advisor. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.

A Roth IRA offers tax deferral on any earnings in the account.  Qualified withdrawals of earnings from the account are tax-free.  Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.  Limitations and restrictions may apply.