Quick Retirement Quiz

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Source: Voya Investment Management, 11/16/2018

Most pension funds assume an 8% annual return. In a low-interest-rate environment, that has proven unrealistic, and one of the biggest pension funds in the United States recently rolled back its assumption to 7%. Using the 7% annual return assumption, can you identify the biggest and lowest retirement nest egg savers in the following scenarios?

  • Reliable Ron invested $10,000 a year from age 25 to age 65 (total invested $400,000)
  • Belated Bruce pursued a professional YouTube career from age 25–35, failed, but then got serious and invested $10,000 a year from age 35 to age 65 ( total invested $300,000)
  • Nonconformist Ned invested $10,000 a year from age 25 to age 35, got fed up with corporate America and at age 35 went to live on an elephant sanctuary, never adding to his nest egg again (total invested $100,000)
  • Timid Tony invested $10,000 a year from age 25 to age 65 but kept it in cash, earning an average of 1.5% per year (total invested $400,000)

Which one has the biggest nest egg at age 65? Here are the exact amounts each saver would have at age 65 using a 7% hypothetical annual rate of return (1.5% for cash):

Saver: Hypothetical Annual Rate of Return | Total Amount Invested | Retirement Savings

  • Reliable Ron: 7% | $400,000 | $2,136,095.70
  • Belated Bruce: 7% | $300,000 | $1,010,730.41
  • Nonconformist Ned: 7% | $100,000 | $1,135,365.28
  • Timid Tony: 1.5% | $400,000 | $550,819.12

Source: Voya Investment Management
The above hypothetical scenarios are displayed for illustrative purposes only. Assumes no taxes, fees or expenses.

Obviously, Reliable Ron is the biggest nest egg saver. Timid Tony is the lowest nest egg saver, despite investing more than Belated Bruce and Nonconformist Ned. Most surprisingly, thanks to time in the market, Nonconformist Ned has more than Belated Bruce despite investing only one-third the amount Bruce did. Ah, the power of compounding — Albert Einstein called it the eighth wonder of the world.

Voya IM does not provide tax or legal advice. This information should not be used as a basis for legal and/or tax advice. In any specific case, the parties involved should seek the guidance and advice of their own legal and tax counsel.

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