Rate of Return

Rate of Return
Sam Seiden Online Trading Academy Follow Following
Often, my articles talk about myth vs reality when it comes to trading, money, and markets. Today, I want to discuss a bigger
picture issue many people lose sleep over. The issue is the amount of savings needed to live the lifestyle you choose to live
today, tomorrow, and into retirement. The professionals and financial industry lead everyone to believe that they need a large
savings amount or else retirement will not be fun and likely consist of moving in with in-laws. How much do you need? Over
the past few years, the professionals have suggested $1 million dollars in savings is a good general number. Recently, The
Street.com released an article with some interesting information on this topic, read below...
"$1 Million Doesn't Cut It for Retirement"

"Conventional wisdom says you need to save $1 million for retirement. That target may be easy to remember, but it falls short
of the true cost of what's required for post-career comfort. Longer life spans, the threat of inflation and the uncertain future of
Social Security benefits make this long-touted savings advice inadequate for most, advisers say. Scottrade recently polled 226
registered investment advisers on the topic and found that 71% don't believe $1 million is enough for the average American
family. Most said families need to save double, or more than triple, the amount. "Younger generations, especially, need to set
their retirement goals higher than other generations and start saving as early as possible," says Craig Hogan, Scottrade's
director of customer-relationship management and reporting. The survey solicited opinions about the current investment
habits of Americans. Questions were broken down by generations to determine advisers' opinions on average investment goals
in today's dollars for various groups.
Generation Y (ages 18 to 26) needs to save at least $2 million, according to 77% of advisers. Forty percent put the figure at $3
million.
Nearly half of advisers (46%) said Generation X (ages 27 to 42) should at least double the $1 million goal. Twenty-two percent
suggested more than $3 million.
For Boomers (ages 43 to 64), 35% recommended $2 million to $3 million. Thirty percent suggested $1.5 million to $2 million."
– The Street.com
So as you can see, now the experts are suggesting that $1 million should be at least doubled and in some age groups, tripled to
$3 million. This and many more articles lead people to believe that how much money you make and save has the biggest impact
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on your financial well-being. If you're a Baby Boomer and you don't have $2 or $3 million lying around in savings, this
conventional thought can be very scary. Are all these experts correct? I say no, let me explain.
Let me introduce you to the Online Trading Academy Financial Calculators. There are a few free calculators to explore at the
address: www.tradingacademy.com/calculators. I strongly suggest you explore and try these calculators, you will find the
results of your inputs fascinating. I have taken some screen shots of one of them, the Retirement Planner. I tried to use some
average inputs to prove my point that the industry has this retirement savings issue all wrong.
In the example above, I input $200,000 of retirement savings, age 50, retirement age of 65, 35 years of retirement income, 7%
rate of return (ROR, I chose this because this is close to the average annual return of the S&P 500), 7% ROR during retirement,
$70,000 household income, and 100% of income at retirement. So, as you can see, we want our retirement income to take us at
least to age 90, and hopefully beyond for us or our loved ones. With these numbers, obviously, we come up very short and run
out of savings at age 72, yuk!
Remember, the industry tells us we need to focus on and increase our retirement savings, and make sure it's in the millions,
according to the financial advisors. In this plan above, the only change I made was to increase that $200,000 in savings to
$400,000 which is a HUGE increase from the original $200,000. Notice with our graph, however, we still don't make it to our
goal and run out of money at age 82. Yikes, what a time to move in with relatives... In the plan below, I added even more to the
savings, bumping up that number to $500,000 from the original $200,000 but when we look at the graph, we still fall short of
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our goal. The important point to note here is that we are making monumental changes to the savings amount, just as the
experts say we should, but it's having very little effect on our financial well-being.
Now, let's change our focus from conventional wisdom and instead of focusing on the amount of savings, let's focus on what we
at Online Trading Academy consider to be the most important focus, the Rate of Return (ROR). In the plan below, I have
brought the $500,000 savings back down to $200,000 and changed the ROR from 7% to 12%. A minor change in this number
has monumental, positive results on our financial well-being. Not only do we meet our goal, we don't ever touch our principle
and have plenty of money left over for our loved ones.
The main point is that the proportion of contribution (savings) doesn't have as big an impact as you thought it might. What has
the biggest impact on your financial well being? RATE OF RETURN!
Why do the big firms typically push the investing public into thinking more savings contribution is the key factor that leads to a
healthier financial retirement? Well, the answer here is typically found by investigating what is in the firm's best interest, not
yours. Most firms make their money on management fees, existing of anywhere from 1 – 4% annually. Very few firms actually
derive profits based on the "performance" of client accounts. Given this information, what leads to higher revenue for the
financial firms are larger accounts, not necessarily strong performance for their clients. The fear tactic of needing that $2
million is powerful, don't let it scare you...
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The path that leads to a standard of living that you desire to live consists of a few steps. First, determine what the health of your
wealth really is, how much savings do you have? Next, figure out what annual income you need to live the lifestyle you desire to
live today, tomorrow, and during retirement. Then, it is easy to figure out the rate of return (ROR) you need to attain that
annual income. Re-creating or creating your paycheck from an objective and rule-based strategy is the answer. In our new
ProActive Investor course, we teach three simple rule-based strategies that when learned in the proper sequence and then used
together, help you attain that ROR you need to live the life you choose to live today, tomorrow, and during retirement. One of
the strategies is market timing based on supply and demand which is a topic I cover often. Market timing is another issue often
talked about by the so-called professionals. They say you can't time the major market turns. I say you can if you know what
you're doing. For more information on market timing based on the laws of supply and demand, see my archived articles. Lastly,
make sure you spend time with the free Online Trading Academy calculators. I guarantee you will find them helpful.
Learn to Trade Now
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Sam Seiden Online Trading Academy Follow Following

"$1 Million Doesn't Cut It for Retirement"

Learn to Trade Now

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