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Building Retirement Strategies

The Foundation of Retirement Strategies

What can be achieved with a fund or flow of money depends on 1) how long one has to generate returns, 2) the risks one wishes to take, 3) the mix of assets in which one is invested, 4) management fees and taxes, and 5) miscellaneous factors, such as buying and selling with perfect timing, that can be called "luck". The prudent investor who is aware of mortality will want to control risk, asset allocation, expenses and taxes and therefore leave as little as possible to luck.

Time to retirement and to death is critical, for if one has as much as 40 years to either critical event, it hardly matters what sorts of assets one buys provided that one has diversified into stocks, bonds and possibly non-financial assets such as real estate. Over periods of 40 years, asset returns converge to the benchmarks for the class, such as stocks or bonds, less management or trading fees and taxes. Therefore, one can buy an index fund or several mutual funds or assemble a portfolio of stocks that are well diversified, collect dividends, pay taxes if need be, and receive an average annual pre-tax return before management fees are deducted that has averaged 11% per year. In bonds, if well diversified, the returns are likely to be 6% before taxes and inflation adjustments. Allow 3% for future inflation and the real returns turn out to be about 8% for stocks and 3% for bonds. Whether one got a good deal or a bad deal at purchase will hardly matter, for the rise in asset prices or in total portfolio returns will make the initial purchase price of the asset in question a trivial issue.