Best Way to Grow Your Retirement Portfolio After 45
The answer, it turns out, is the opposite of the strategy for younger investors
By Craig L. Israelsen, Ph.D.  July 25, 2013
Craig L. Israelsen, Ph.D., teaches in the personal financial planning program at Utah Valley University in Orem, Utah. He is the author of 7Twelve: A Diversified Investment Portfolio With a Plan and his website is 7TwelvePortfolio.com.
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There are two engines of growth in a retirement portfolio: the contributions made by the investor and the rate of return generated by the portfolio itself. Which has the greater impact? The answer for older investors is the opposite of what it is for younger investors.
Based on my analysis, for investors over 45, the key is how much money you invest each year. For younger ones, it’s your annual rate of return.
My conclusion: Older investors should save more money annually conservatively, rather than build aggressive portfolios weighted toward stocks that expose them to the risk of large losses in any given year.
What the Savings Matrix Reveals
Below, I’ve created a “Savings Matrix” showing the dichotomy in dollars and cents, with various retirement portfolio balances at age 65 based on four starting ages of an investor.
(MORE: Is $1 Million Enough to Retire?)
The baseline figures (shaded in gray) assume an annual savings rate of 6 percent of income and a 6 percent annualized portfolio return. The variable is moving from a 6 percent savings rate to a 10 percent savings rate or moving from a 6 percent portfolio return to a 10 percent return (while, in both cases, holding the other variable constant). Clearly, a 6 or 10 percent savings rate and portfolio return are not the only possible figures; the point of this analysis is to isolate the general impact of changing the savings rate vs. changing the portfolio return at various ages.
For someone who begins investing at 25 and saves 6 percent of income, the portfolio would be worth $528,007 at 65 (assuming a $35,000 starting salary and a 3 percent annual raise). If the annual return was 10 percent, the savings stash would be nearly $1.4 million. On the other hand, if the investor saved 10 percent per year and the annual return stayed at 6 percent, the portfolio would amount to $880,012 at 65.
Clearly, for a young investor, the retirement portfolio’s rate of return has more impact than the annual savings rate. (Of course, the best of all worlds for this 25year old would be to save 10 percent and earn 10 percent – then, the portfolio value at 65 would be an astonishing $2,321,264.)
(MORE: Smart Money Moves Now That Interest Rates Are Rising)
For a 35yearold, increasing the portfolio’s return also has a bigger payoff than upping the savings rate. With a 6 percent savings rate and a 6 percent annualized return, the portfolio value at 65 would be $337,540 (assuming a salary of $47,000 at 35 and a 3 percent annual raise). A 10 percent return would produce a $673,071 retirement fund, quite a bit more than the $562,567 from raising the savings rate to 10 percent while earning 6 percent.
Results for Investors in Their 40s and 50s
Now, at age 45, things get interesting.
A person who starts investing at 45 benefits more by raising his or her annual savings rate from 6 to 10 percent rather than by trying to increase the portfolio’s return from 6 to 10 percent.
For a 45yearold, the $194,606 portfolio at 65 (assuming a 6 percent savings rate and 6 percent return) would grow to $300,173 with a 10 percent return but would be even larger – $324,344 – by saving 10 percent a year while earning 6 percent.
An investor who begins saving for retirement at 55 would also do better by saving 10 percent instead of 6 percent ($145,573 at 65) than by earning 10 percent with a 6 percent savings rate ($106,961). A portfolio with a 6 percent savings rate and 6 percent return would deliver just $87,344 at 65.
The results for older investors may seem counterintuitive to you. After all, the conventional wisdom seems to suggest that a person who is late to the retirement planning game needs to make up for lost time by building a portfolio that can crank out returns of 10 to 12 percent a year. That would be a portfolio weighted heavily toward stocks.
(MORE: The Most Important Thing to Know About Your 401(k))
But this research suggests otherwise. The older investor would be better off saving more each year and be content with a respectable return of 6 percent or so rather than not contributing much and building an overly aggressive, high risk/high return portfolio.
The Savings Matrix
Think of it this way: If the investor’s time frame is reduced to 20 years from 40 years, the beneficial impact of compounding (that is, the portfolio performance) has been dramatically reduced because of the shorter time frame. The dramatic compoundingbased growth in a portfolio really starts to pick up steam after 20 to 25 years.
The Risks of ‘Juicing’ a Portfolio
So, with a shorter time frame to work with, an investor benefits more by the amount of contributions made each year. What’s more, “juicing” an investment portfolio to shoot for higher returns (in hopes of making up for lost time) increases the risk of loss significantly.
A higherreturn portfolio is also a higherrisk portfolio, which can be dangerous for older investors. If they incur large losses because the stock market soon nosedives, they’ll have fewer years to recover. On top of that, there’s the emotional toll that large portfolio losses can inflict on older investors.
It’s also worth remembering that the size of your annual contributions is an investing variable you can determine, while portfolio performance (particularly in the short run) is less controllable.
Investors who rely on the performance of their portfolios to make up for insufficient savings contributions during their careers will usually fall into the trap of having too much equity exposure and then be exposed to too much risk.
It is my opinion that the performance of an investment portfolio should accomplish two primary goals: Preserve and protect your contributions and provide a modest rate of return. If you’re older than 45 and want to build up your retirement fund, start investing more each year in a prudent, welldiversified portfolio.
Based on my analysis, for investors over 45, the key is how much money you invest each year. For younger ones, it’s your annual rate of return.
My conclusion: Older investors should save more money annually conservatively, rather than build aggressive portfolios weighted toward stocks that expose them to the risk of large losses in any given year.
What the Savings Matrix Reveals
Below, I’ve created a “Savings Matrix” showing the dichotomy in dollars and cents, with various retirement portfolio balances at age 65 based on four starting ages of an investor.
(MORE: Is $1 Million Enough to Retire?)
The baseline figures (shaded in gray) assume an annual savings rate of 6 percent of income and a 6 percent annualized portfolio return. The variable is moving from a 6 percent savings rate to a 10 percent savings rate or moving from a 6 percent portfolio return to a 10 percent return (while, in both cases, holding the other variable constant). Clearly, a 6 or 10 percent savings rate and portfolio return are not the only possible figures; the point of this analysis is to isolate the general impact of changing the savings rate vs. changing the portfolio return at various ages.
For someone who begins investing at 25 and saves 6 percent of income, the portfolio would be worth $528,007 at 65 (assuming a $35,000 starting salary and a 3 percent annual raise). If the annual return was 10 percent, the savings stash would be nearly $1.4 million. On the other hand, if the investor saved 10 percent per year and the annual return stayed at 6 percent, the portfolio would amount to $880,012 at 65.
Clearly, for a young investor, the retirement portfolio’s rate of return has more impact than the annual savings rate. (Of course, the best of all worlds for this 25year old would be to save 10 percent and earn 10 percent – then, the portfolio value at 65 would be an astonishing $2,321,264.)
(MORE: Smart Money Moves Now That Interest Rates Are Rising)
For a 35yearold, increasing the portfolio’s return also has a bigger payoff than upping the savings rate. With a 6 percent savings rate and a 6 percent annualized return, the portfolio value at 65 would be $337,540 (assuming a salary of $47,000 at 35 and a 3 percent annual raise). A 10 percent return would produce a $673,071 retirement fund, quite a bit more than the $562,567 from raising the savings rate to 10 percent while earning 6 percent.
Results for Investors in Their 40s and 50s
Now, at age 45, things get interesting.
A person who starts investing at 45 benefits more by raising his or her annual savings rate from 6 to 10 percent rather than by trying to increase the portfolio’s return from 6 to 10 percent.
For a 45yearold, the $194,606 portfolio at 65 (assuming a 6 percent savings rate and 6 percent return) would grow to $300,173 with a 10 percent return but would be even larger – $324,344 – by saving 10 percent a year while earning 6 percent.
An investor who begins saving for retirement at 55 would also do better by saving 10 percent instead of 6 percent ($145,573 at 65) than by earning 10 percent with a 6 percent savings rate ($106,961). A portfolio with a 6 percent savings rate and 6 percent return would deliver just $87,344 at 65.
The results for older investors may seem counterintuitive to you. After all, the conventional wisdom seems to suggest that a person who is late to the retirement planning game needs to make up for lost time by building a portfolio that can crank out returns of 10 to 12 percent a year. That would be a portfolio weighted heavily toward stocks.
(MORE: The Most Important Thing to Know About Your 401(k))
But this research suggests otherwise. The older investor would be better off saving more each year and be content with a respectable return of 6 percent or so rather than not contributing much and building an overly aggressive, high risk/high return portfolio.
The Savings Matrix
Starting Age  Retirement Portfolio Value at Age 65  
6% Savings Rate 6% Portfolio Return 
6% Savings Rate 10% Portfolio Return 
10% Savings Rate 6% Portfolio Return 

25  528,007  1,392,758  880,012 
35  337,540  673,071  562,567 
45  194,606  300,173  324,344 
55  87,344  106,961  145,573 
Think of it this way: If the investor’s time frame is reduced to 20 years from 40 years, the beneficial impact of compounding (that is, the portfolio performance) has been dramatically reduced because of the shorter time frame. The dramatic compoundingbased growth in a portfolio really starts to pick up steam after 20 to 25 years.
The Risks of ‘Juicing’ a Portfolio
So, with a shorter time frame to work with, an investor benefits more by the amount of contributions made each year. What’s more, “juicing” an investment portfolio to shoot for higher returns (in hopes of making up for lost time) increases the risk of loss significantly.
A higherreturn portfolio is also a higherrisk portfolio, which can be dangerous for older investors. If they incur large losses because the stock market soon nosedives, they’ll have fewer years to recover. On top of that, there’s the emotional toll that large portfolio losses can inflict on older investors.
It’s also worth remembering that the size of your annual contributions is an investing variable you can determine, while portfolio performance (particularly in the short run) is less controllable.
Investors who rely on the performance of their portfolios to make up for insufficient savings contributions during their careers will usually fall into the trap of having too much equity exposure and then be exposed to too much risk.
It is my opinion that the performance of an investment portfolio should accomplish two primary goals: Preserve and protect your contributions and provide a modest rate of return. If you’re older than 45 and want to build up your retirement fund, start investing more each year in a prudent, welldiversified portfolio.
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