• Darryl Rosen

The "Turtle" and the Hare!

Saw this little guy on my driveway.

Besides an unfortunate reminder of how fast I'm running these days, this turtle should be a constant reminder of how money grows most efficiently.

Most retirement calculators like the ones you might find on the Internet assume a linear rate of return. That is - if you enter 5% growth, the analysis will factor in a linear 5% return.

How can I say this diplomatically. That's sort of a scam.

Money DOES NOT grow that way. Assuming linear growth might make the results look good, but if you rely on this level of investment growth to determine your spending in retirement, it may come back to bite you.

Scenario one: we are assuming a constant 5% rate of return and a nice bit of compounding. (NOTE: This only works if you are getting the same return year after year!)

In the end we have 28% growth. The average annual rate of return is 5%, but because of compounding, we got that extra bump. This is like the turtle. Slow and steady.

What if the returns are more volatile?

In Scenario 2 - we lose almost 5% in the first year, as compared to scenario 1 - a 5% increase. This would leave you with nearly 100K less after one year and, unfortunately, you would be one year closer to retirement. Not good!

In Scenario 3, there is one bad year followed by a few muddling years - then a good one! (20%). Because of the big loss in year one - after 5 years your retirement funds have only increased by 9% overall. You had some compound returns, but you started at a lower base because the first year returns were so bad.

Here's the point:

Do not assume a linear rate of return like most retirement calculators use. Lower yearly returns (with a chance at COMPOUNDING) is a more favorable scenario. Certainly, when compared to years of up and down (volatile) returns. As you get closer to retirement, this concept is even more magnified.

Compounding is a well mis-understood topic. It only works when you avoid large losses. This is why when choosing between the tortoise (in this case the turtle) and the hare, always choose the turtle.

Northwest Suburbs
1821 Walden office Square
Suite 400
Schaumburg, IL 60173

Phone: (224) 300-5174

Western Suburbs
3333 Warrenville Road
Suite 200
Lisle, IL 60532
Northern Suburbs
790 Estate Drive
Suite 200
Deerfield, IL 60015
Copyright © 2020 Rose Advisory Group. All Rights Reserved. 

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and Rose Advisory Group are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. The content of this website is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. Investments and/or investment strategies involve risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a monthly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by BCM.  Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract.