In my last post we looked at how much money you would have to save per year to have $875,000 in savings from a portfolio that yields a return of 8%. For 10 years it was $60,400 per year, for 20 years it was $19,121 per year and for 40 years it was $3,378.
Of course, you have another option to just saving more money per year. You could increase the risk of your portfolio instead. If you had a portfolio that was 50% stocks with a 10% average return and 50% bonds with a 6% return, you would have a portfolio with an 8% return. ((10% x.5) + (6% x .5)) = (5% + 3%) = 8%.
You can increase the risk in the portfolio in many ways. If you increase the percentage of stocks, this will increase the risk and expected return. You can invest in stocks that are higer risk or have a higher beta. That is for any given movement in the stock market, they move at some multiple of that amount. So, if you increased the percentage of stocks in the portfolio to 80% and increased the beta so you expected a 12% return on the stocks, you would have an expected return of 10.8%. Let's rerun the 10, 20 and 40 year savings schedule with the new returns.
To achieve your goal of saving $875,000 in 10 years at a savings rate of 10.8% you would need to save $52,832 per year versus the $60,400 at an 8% return. For 20 years it would be $13,945 versus $19,121. For 40 years it would be $1,589 per year versus $3,378.
This example gives you some idea of how the variables of time available to save, the return available on savings and the amount that you can save affect your goal of having enough to live on during retirement.
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