Most Successful Strategy in Building Your Nest Egg

By Mark Delp, CFP – The Wealth Effect

September 14, 2012

Putnam Investments recently released a study where they tried to identify what factors impacted an individual’s 401k balance the most.

They started with the following base scenario: 28 year old in 1982 who earned $25,000 per year with a 3% cost of living increase.  The worker contributed 3% of their salary into a 401k plan that receives a 50 cent match on the dollar up to 6% of pay and has a conservative asset allocation spread across six asset classes. The hypothetical 401k also invested in funds whose three year returns were in the bottom 25% of peer group as measured by Lipper as of 1982. By the time the worker turned 57 in 2011, their income was $57,198 and their 401k balance was $136,400.

Then Putnam ran different scenarios:

First Quartile:
Instead of owning funds whose three year returns were in the bottom 25% of peer group as of 1982, what if the participant picked the funds whose three returns were in the top 25% of peer group as of 1982.

Three-Year Rotation:
Instead of holding the same funds for the entire 29 year time frame, the participant would rotate every three years into funds whose three year returns were in the top 25% of peer group.

Index Funds
Instead of buying actively managed funds, the participant purchased index funds.

Asset Allocation
What would happen if the participant increased the percentage of their money held in stocks to 60% from base scenario of 30%? What would happen at 85% stock allocation?

Crystal Ball
A “crystal ball” strategy that predicted which funds would become first quartile performers.

Deferral Rates
This is the strategy they found that made the biggest difference.

Conclusion:
You and I cannot control how well our funds perform but we can control how much we save and according to this report, that has by far the greatest impact on your retirement accounts.

When was the last time you increase your deferrals?

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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.