Across My Desk
In a recently released Putnam study titled "The Secret for Successful 401 (k) Investing", you won't learn any secrets but will be reminded of what it takes to build a retirement nest egg.
It may not be news, but if there's one thing you can do to build a bigger nest egg, it's to save more. Okay, so there's no surprise there except for this simple truth: The more you save today the more you're likely to have tomorrow.
Here's more about that Putnam Investments study:
- The study compared three components of defined contribution savings over a 15-year period: mutual fund performance, asset allocation and contribution level. Mutual fund performance had the least impact.
- The study showed that if investors had a crystal ball and were ableto know in advance which mutual funds would perform in the topquartile and then invested in them, their retirement wealth would onlybe 6% more over the 15-year period than if they had selectedbottom-quartile funds. Changing the allocation from a conservative toa more aggressive portfolio increased results by over 20%.
- Additionally, the study showed that there is a relatively small difference between investing in a top-performing mutual fund versus a poor performer.
- What matters the most, however, in the final size of your nest egg is the size of your contributions.
In this study, a 2 percentage point increase (from 2% to 4% of salary, e.g.), which doubled retirement wealth, had 90 times the impact of changing from bottom-quartile to top-quartile funds after 15 years.
Bottom line: Save more.
This Putnam Investments study covered the 15-year period of January 1, 1990 to December 31, 2004, and is based on data provided by Lipper, which ranks funds based on total returns and without sales charges, according to similar investment styles or objectives in a given fund category.
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