How a Fiduciary Can Assess a Retirement Investor’s GOT
Yippee! You’re a retirement investor and your plan fiduciary has just opened your eyes to the Retirement Readiness Calculator. Through this, you’ve discovered your number – your Goal-Oriented Target (or “GOT”). Is your GOT 20%? Or is it 5%? Maybe you’re one of the few who have obtained a GOT of 0%? What does it mean? Is it good? Is it bad? How can you tell? And what do you do about it if you don’t like what you’ve discovered?
The table below might be a useful way to begin to answer this question. The columns represent the number of years until you retire and the rows represent your GOT. Find the row and column that come closest to your personal numbers and look at the cell in the table where they intersect. For example, if you will retire in 10-years and your GOT is 3%, then the cell they where they meet is 87.34% What does that 87.34% mean?
Table: How Good is My GOT?
Source: Ibbotson, FiduciaryNews.com
The percentages represent the summation of all the stock returns from 1926 through 2013 (data courtesy of Ibbotson Associates, a division of Morningstar and a leading provider of historical market return data). From that data, every rolling period return from 1 rolling year to 70 rolling years. The table only shows the rolling year results for some years due to space limitations on this page. If you’re a member of the FiduciaryNews.com Retirement Adviser Community, you can gain access to a greater array of charts like this one.
That 87.34% means that for all rolling 10-year periods, the investment return met or exceeded the GOT of 3% a grand total of 87.34% of the time. That’s a pretty good batting percentage and one that most people can live comfortably with. You might think of this number as the “Frequency,” as in “How frequently the actual results for this period meet or exceed the GOT.”
Now let’s consider someone who will retire 40 years from now and has a GOT of 14%. We see where the lines intersect and we find a big fat goose egg of 0.00%. That’s bad. It means in the last 88 years, there are no 40 year periods of stock market returns that yielded an annual return of at least 14%. This person will definitely want to read “5 Things to Do to Improve a Retirement Investor’s Goal-Oriented Target” to find out how to lower his GOT.
If you haven’t figured it out by now, the closer you get to the green and white shading on the table, the better off you are. Black is bad – it means there’s been no period in recent history where stocks produced returns needed to match that GOT. In fact, one might venture to say anything where the figures themselves are in white (i.e, the black and crimson portion of the table) should be considered bad. In all these cases, the Frequency (i.e., the chances of meeting or exceeding your GOT) is less than 50%. You might say, those folks with GOTs and years to retirement equating to a white number might be in “peril” – i.e., a very dangerous situation when it comes to retiring in comfort.
Obviously, black numbers on a white background is best, but anything in a green background is acceptable. Since many people have at least 15 years to go before they retire, this mean any GOT at or below 6% is an acceptable number.
Bear in mind this one thing about the average stock market return over this entire period. It’s a little more than 10% (the row where GOT is equal to 10% is italicized in the Table). Many people (even professionals) like to use this 10% return number to project returns. As you can see from the Table, a 10% GOT is only acceptable for people retiring in 30-35 years. Those are the only periods where the Frequency is greater than 80%. That’s also why it’s better to use 8% in forward looking return calculations. It has a higher degree of likelihood of actually being achieved, including all periods extending beyond 25 years.
A Special Word for Those Whose GOT is “0%”
No, you didn’t break the calculator. A “0%” GOT means you are on course to accumulate the assets you need to achieve a comfortable retirement without getting any return on those assets. It means you don’t have to take any risk at all. Does that mean you shouldn’t invest? I’ll leave that for you to decide for yourself or with the help of a professional adviser.
In the meantime, for those of you who are well within the green and white shades of the Table, “Congratulations! You have an acceptable GOT.” For those who want to improve their GOT, read “5 Things to Do to Improve a Retirement Investor’s Goal-Oriented Target”.
Interested in learning more about issues facing today’s 401k investors and how professionals advise them? Check out Mr. Carosa’s upcoming book Hey! What’s My Number?, available later this summer.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.