Returns matter more than you think

Returns matter more than you think

Contributions need to work as hard as participants do. After 40 years of saving, 70% of a participant’s retirement account value will likely come from returns, not contributions.

A graph shows the manner in which returns start to outpace contributions over time. In a hypothetical example, a participant earning a 6% return contributes 94% toward total account value. Fifteen years later, returns will have increased to the point where they are greater than the participant's annual contributions. After 40 years, retirement returns may far outpace contributions, accounting for 70% of the participant's retirement account value.  See footnote: 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 by CBS Moneywatch.

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 by CBS Moneywatch.

That's why investment selection matters

The starting point:

This hypothetical assumes you start investing 10% of your $40,000 income at age 26.  And that you continue to contribute 10% each year throughout your career, as your salary increases 3% per year.

A simple pie chart shows 10% of a participant's income being invested in their retirement savings account. See footnote: Hypothetical results are for illustrative purposes only and in know way represent the actual results of a specific investment. Your investment experience will differ.

The turning point:

Fifteen years down the road, assuming a 6% return, you'd earn $7,500 in annual returns.  But you'd contribute about $6,000 that year, which means your returns already outpace your contributions.

A bar graph shows that in year 10 of this example, the participant contributes $5,000 of their income and earns $4,000 in returns. In year 15, they contribute $6,000 and earn $7,500 in returns. In year 20, they contribute $7,000 and earn $12,000 in returns.  See footnote: Hypothetical results are for illustrative purposes only and in know way represent the actual results of a specific investment. Your investment experience will differ.

The retirement point:

Returns would comprise 70% of your account by the time you retire.  But if you earn a higher return — say 8% per year — your returns would make up 81% of your account.  And you'd earn $602,479 more, double your overall contribution.

A comparison chart shows the difference in savings between a 6% rate of return versus an 8% rate of return. By age 65, the participant earning 6% would have earned about $1 million. The participant earning 8% would have earned over $1.6 million. See footnote: Hypothetical results are for illustrative purposes only and in know way represent the actual results of a specific investment. your investment experiences will differ.

Hypothetical results are for illustrative purposes only and in no way represent the actual results of a specific investment. Your investment experience will differ.

Put choice of manager top of mind

The quality of the investments starts with who is managing them. Active managers who have a history of beating the market indices may give participant contributions the biggest boost.

Resources

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.