How Does Your Retirement Account Compare?
Each year millions of Americans save part of their income in a 401(k) or an IRA (Individual Retirement Account.) The money put in either of these is not subject to income tax and is one of the household’s largest financial asset worth more than $30 trillion.
A401(k) plans are set up by employers and in most cases have the funds in these accounts are managed by financial institutions picked by the employer. The participant manages the funds in an IRA. The value of these assets depends on how well the funds have been invested and how much has been withdrawn in management fees.
The more years you have participated in a plan that charges an annual fee as a percent of the value of the fund, the larger the percent of fund that has been paid in fees. A quick way to estimate the percent of your fund that has been paid in fees is to take half the number of years in the plan times the percent in management fees. For example, a plan that is 20 years old and has a one percent fee, has paid ten percent of its portfolio in management fees.
Picking the financial assets to make a retirement account grow the most, is the job of whoever is managing the funds, be it the Individual, a large investment house or a hedge fund. This comparator is a way to compare how you have done relative to four different types of “generic” portfolios.
What you need is:
1. The amount you saved each year you participated in the plan.
2. The percent of the assets charged as management fees.
To use the comparator, enter the first year of your plan, the amount you contributed that first year and the last year you were contributing (usually the year you retired.) If you are still contributing, enter 2016.
When you click “calculate” the rest of the years will show up and you can enter the amount you contributed each year. At the bottom you can enter the management fee you paid as a percent of amount in you plan.
When you click “calculate” the second time, you will get what would be the value of your plan if it had been invested each of the four portfolios and amount paid in management fees.
The four generic retirement portfolios are:
A short-term asset portfolio (similar to a saving account at a bank)
The short-term asset portfolio assumes that the first year payment minus the mangement fee is deposited in an short-term asset in equal installments throughout the initial year. The principal, plus the interest accumulated, minus the mangement fee is added to the second year payment and reinvested at the average short-term rate for the second year. This continues each year that payments are made.
The short-term rate used is the interest return on treasury bills carried back in time by the interest rate on commercial paper as found at What Was the Interest Rate Then?
A long-term asset portfolio (similar to a mutual fund of corporate bonds)
The long-term asset portfolio is computed the same way as the short-term portfolio and it is assumed that the investment will be held one year and then reinvested at the new long-term rate for the current year. (see the Saving Compartor on how to compute values using different number of years of investment.)
The return on the long-term assest is the annual average of Corporate bonds/Moody’s seasoned Aaa as found at What Was the Interest Rate Then?
A stock portfolio stock portfolio (that buys the stocks in the S&P 500 composite index.)
The stock portfolio assumes that the first year payment minus the mangement fee is used to purchase a share of all the stocks in the composite average at their average price during January of the initial year. The dividends earned during the year are assumed to be reinvested at the price of the stocks in the composite in the January of the next year. The stock portfolio in the second year is the first year payment plus the dividends reinvested minus the management fee charged plus the second year payment. This process continues every year that payments are being made into the plan.
It is also assumed that, during the entire period of investment, there are no other commissions or taxes paid. The stock asset used is the Standard and Poor's Composite Index. The data, with an explanation of how they are computed, are in The Annual Standard and Poor's Composite Stock Index, the Yield, and a "Portfolio" of the Index with Dividends Reinvested.
A gold portfolio
The gold portfolio assumes that the first year payment minus the management fee is used to purchase gold at its average price for that year. The same process takes place each year there after and the amount is added to the stock of gold being held. The gold price used is the London market price of gold found on The Price of Gold, 1257 - Present.