I can't predict much about the future, let alone the guarantee for investors.
However, I can guarantee one thing: if you achieve an additional annual return of only 0.5% for your portfolio while building up your assets – and you do this even after retirement – you have many, many dollars ahead.
The difference can change both your life and that of your future heirs. Much of your investment return is determined by things beyond your control.
• Have you been lucky enough to be born into a family that gave you good education, good financial examples, and maybe even a trust fund?
• Or did you have to fight for every dollar and benefit?
• When you approach retirement or finally make the leap, does the market suddenly deteriorate significantly, forcing you to say goodbye to a lot of the money saved?
These and other important factors such as your health will surely shape your financial future.
But how well you do financially over the course of your life also depends on how well you play the cards that fate offers you. A good place to start is to understand how big a business is that in the long run is just under 0.5 percentage points in the long run.
Imagine you and your twin sister celebrating your 21st birthday together. You decide to invest $ 5,000 at a time and add the same amount on each subsequent birthday until you reach the "new" expected retirement age of 67.
Now imagine that your sister – for whatever reason – has an annual return of 8.5% for the entire period, while your own retirement benefit only earns 8%.
Let us ignore the taxes and assume that you are doing so within a Roth IRA.
Your first investment is on your 21st birthday, your last one on your 66th birthday. These 46 investments cost each of you $ 230,000.
On your 67th birthday, you and your sister compare notes as you prepare for your first annual retirement. You agree that you will withdraw 4% of the credit on your account on this and every other birthday.
If you followed this plan faithfully, your Roth IRA should be worth around $ 2,259,500. Your sister's worth should be around $ 2,657,300. Only this difference of almost $ 400,000 is significantly more than any of the annual savings one of you have made over the years.
Your sister's higher portfolio value on your 67th birthday together is the first of three financial results she gets when she earns an additional 0.5% on the go. The other two are bigger.
You deduct 4% or $ 90,380 for the following year to supplement your social security (which we hope will be there) and the other resources you need to support your retirement.
Your sister's first 4% payout is $ 106,292 – which gives her significantly more for the first year of retirement. (Maybe she'll pick up the bill the next time you both go to dinner!)
Let's say you and your sister are in good health and can expect another 30 years to reach your 97th birthday. Let's also assume that after you retire, you reduce your investment portfolios to take less risk by investing more pension funds and less in stocks.
And (this is critical) Let's say your sister does 0.5% more than you retire for some reason.
If your retired Roth IRA earns 6% and you continue to withdraw 4% each year, you've deducted a total of $ 3.54 million by your 96th birthday – a huge return on the $ 5,000 you spent over the course of the year who have done years.
This is the second of the three financial results of your long-term plan.
And your sister? She will be able to take you out to dinner many, many times in retirement. Their total payouts are $ 4.48 million.
So far, this additional 0.5% return has been worth almost $ 950,000 to them.
The third financial outcome of all of this is the amount each of you has left on your 97th birthday if we assume (for the purposes of this example only) that your life will end.
Your Roth IRA will be valued at $ 3.81 million at this point, which makes your heirs very grateful for your long-term investment success.
Your sister's account is valued at $ 5.16 million and amply rewards her heirs for this additional 0.5% return over many, many years.
The following could be seen as the “bottom line” between these two portfolios:
• The total of all your retirement payouts plus the remaining amounts is $ 7.35 million.
• The comparable amount for your sister: $ 9.64 million.
This difference – about $ 2.3 million – resulted from just one thing: the additional 0.5% of the return over a long life.
I can't guarantee that you (or your sister) can get 8.5% or 8% or 6.5% or 6% returns.
But I can guarantee that an additional return of 0.5% will make a huge difference in the long term. And I can guarantee that you will get at least that much additional return (and possibly a lot more) if you do a few relatively simple things that are under your control.
Here are three places to get this 0.5% advantage.
• First invest in investment funds with lower costs. A typical actively managed fund charges an annual cost of 1%. A typical index fund charges much less than half of that amount. Check.
Second, increase your portfolio's equity allocation by 10 percentage points. In the past 50 years, for example, a change from 50% in equities to 60% has led to an additional return of more than 0.5%. Check.
• Third, invest in the S&P 500 index
However, add equity asset classes that have long outperformed this index with little or no additional risk. Here is an easy and very effective way to do this. And here is an even easier way.
This third step, known as diversification, is one of the smartest things investors can do.
Only these three simple steps, all of which are completely under your control, will make a big difference in the long run. As these numbers show, small things can mean a lot. Guaranteed.
Richard Buck and Daryl Bahls contributed to this article.