DEFINED CONTRIBUTION

Something to keep in mind when waters turn dangerous

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Long-term investing can pose unexpected risks. One way to stay focused is to look for funds that have done just a little bit better over time. Past performance is not indicative of future results, of course, but even a few percentage points more per year may add years of retirement income.

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Small increases, big outcomes

Even a hypothetical 0.5%–1% annual boost in returns can have a strong impact.

Impact of 50 bps and 100 bps increases in return in a hypothetical savings and withdrawal scenario

This graph is a visual representation of the Demographic and Scenario assumptions below. It shows that, over 40 years of investing, the baseline account balance was $886,415. The account balance, with a return of 0.50% more, would be $106,266 higher, and with a return of 1.00% more, would be $227,763 higher. With annual withdrawals of $60,260, the returns of 0.50% and 1.00% more would provide 5 years and 16 years of additional retirement spending, respectively.

Demographic assumptions

Starting balance

$0

Starting age

25

Starting salary

$40,000

Annual salary growth rate

3%

Annual contribution rate

10%

Retirement age

65

Ending salary at 65

$130,482

Scenario assumptions

(Assumes equivalent annual retirement income)

0

Baseline

+50 bps

+100 bps

Returns before 65

5.5%

6.0%

6.5%

Returns after 65

3.5%

4.0%

4.5%

Account balance at 65

$886,415

$992,680

$1,114,177

Annual retirement income*

$60,260

$60,260

$60,260

Years of retirement spending

20 years

25 years

36 years

Alternative annual withdrawal scenario

(Assumes entire account balance is spent over 20 years)

0

Baseline

+50 bps

+100 bps

Years of retirement spending

20 years

20 years

20 years

Annual retirement income

$60,260*

$70,234

$81,965

*Withdrawal that produces 20 years of income in the baseline scenario, which equates to an income replacement of 46% of the ending salary.

Source: Capital Group. The demographic assumptions, returns and ending balances are hypothetical and provided for illustrative purposes only, and are not intended to provide any assurance or promise of actual returns and outcomes. Returns will be affected by the management of the investments and any adjustments to the assumed contribution rates, salary or other participant demographic information. Actual results may be higher or lower than those shown. Past results are not predictive of results in future periods. Based on an exhibit from Russell Investments. The additional years of retirement spending are intended to represent a conservative measure. Totals may not reconcile due to rounding.

That’s the true value of finding the right fund and the right manager. It can give participants the retirement lifestyle they deserve.

Why settle for the baseline when you can elevate a participant’s retirement? 

A 1% annual increase in returns could mean an additional 16 years of retirement spending for participants. That’s 192 months of retirement income participants may not have even anticipated. 

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