Size doesn't always matter. But in many things, it does. Some compound mitre saws, for example, are just too heavy to lug around. The extra-large pepperoni pizza, even though it's on sale, is more than one person should probably eat. If you have six young children, a sporty coupe may not be the best choice for your only car.
When it comes to finances, size definitely matters. I'm speaking here of your portfolio. We all want to retire with an ample nest egg to live off of for the rest of our lives. When thinking about this, we often focus on the rate of return we'll earn, aiming for high returns. But remember, that's only part of the formula for success -- another key part is your portfolio's size.
The biggest portfolios start big
To help you meet your goal of an ample nest egg, I can explain how you might increase that nest egg, say, 10-fold. (It will take you 25 years growing at 10% or 19 years growing at 13%, for example.) But though that might sound impressive -- it's a 900% gain, after all -- it won't necessarily make a huge difference to you, if your portfolio is rather puny to begin with.
Consider this: If your portfolio is $25,000 strong, you might be feeling pretty good. But if you increase that tenfold over a bunch of years, you'll end up with $250,000. While that sounds like a nice chunk of change, it's probably not enough to get you through more than six or seven years of retirement.
You'll spend a lot when you're old
In our Rule Your Retirement advisory service, I learned that in order to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement. Four percent of $250,000 is $10,000, or $833 per month. Will that be enough to sustain you? Well, maybe -- if you have some other significant sources of income, such as Social Security and maybe even a pension -- but more likely maybe not.
You need to start with more money.
If you start out today with $100,000 in your portfolio and increase it 10 times over 20 years, you will end up with $1 million -- enough to provide $40,000 per year, or $3,333 per month. Much better, no?
I make this point to drive home how important it is to save and accumulate money for retirement sooner rather than later. Take some time to see how big your nest egg really is right now -- that can help you determine how much it might grow to later.
Catching up
Don't worry, though, if all you have is that $25,000 -- or less. You can still build a much better retirement for yourself. If you feel like you're behind in your saving and investing, the trick is to invest as much as possible as soon as possible. Give each of your precious dollars as much time to grow as you can. If you're 20 years from retirement, a dollar invested today has 20 years to grow, and its biggest years will likely be its last ones. If you put off investing it for a few years, you'll lose those last powerful years of growth.
It will take $25,000 a little less than 25 years to become $250,000 on its own if it grows at the market's historical average of 10%. But if you chip in $1,000, $5,000, $10,000, or what-have-you each year along the way, your nest egg will grow faster and faster.
Another way to turbocharge your portfolio is to aim for more than that historical market average return of 10%. There are plenty of wonderful, growing companies that will reward you with higher-than-average returns -- particularly if you buy when they're essentially on sale for some reason. Now, don't get me wrong -- it can take some skill to regularly beat the market with individual stock picks, so if you go this route, make sure you're willing to devote lots of time to stock research.
If you don't have that kind of time, you can also do very well owning a carefully selected portfolio of actively managed mutual funds to complement a core holding of index funds (which will match the market's return). The Manning & Napier Equity Fund, for example, has advanced an annual average of 11.6% over the past five years, besting the S&P 500 by more than four percentage points annually. (Its top holdings, in case you're curious, recently included EMC (NYSE:EMC), Time Warner (NYSE:TWX), Automatic Data Processing (NYSE:ADP), UPS (NYSE:UPS), Medtronic (NYSE:MDT), Cisco (NASDAQ:CSCO), and Checkfree (NASDAQ:CKFR). Nice, eh?)
The tax man cometh
One more thing to keep in mind is taxes. It can make a difference what you invest in via your IRA or 401(k) versus your regular brokerage account. Here's how Robert Brokamp explained it in our Rule Your Retirement newsletter: "The basic theory goes like this: Fill your tax-favored retirement accounts with the most tax-inefficient investments (i.e., the investments that generate the biggest tax bills) and use non-retirement accounts for investments that are already tax-efficient."
High-yield (a.k.a. junk) bonds, for example, are much less tax-efficient than stocks you intend to hold for many years, and should therefore be held in your most tax-efficient account. Municipal bonds, on the other hand, are generally the most tax-efficient investment you can make and should not be held in an IRA.
To learn more about ways to supersize your retirement savings and pay less in taxes this year, click here to take advantage of a free 30-day trial of Rule Your Retirement. Doing so will give you full access to all past issues. They feature great advice, along with numerous stock and mutual fund recommendations.
Remember that what you get out of your retirement savings all depends on what you put into it. Size matters -- especially in your earlier years.
Longtime Fool contributor Selena Maranjian owns shares of no company mentioned in this report. Time Warner is a Stock Advisor recommendation. UPS is an Income Investor pick. The Motley Fool is Fools writing for Fools.
