Asset allocation study

A while back I had alluded to some retirement calculations where I estimated what kind of return was necessary to provide a good chance of maintaining a certain lifestyle (as measured by current expenditure as a percent of total assets) and not bleed your assets to levels that would be uncomfortable as you get older.  The numbers I had come up with were 2% return over inflation coupled with an expense rate of 1.6% would yield an excellent profile for retirement.  There are many other parameters and the full details I will disclose over time once I figure out a good way to present them.

So, that's all well and good if you can get 2% over inflation.  But, today, the long term TIPS are yielding 0.5% over inflation!  That's a far cry from 2%.  Of course, taking risk should yield higher real returns over time, but the difference is large enough that I figured I would run the numbers again.  Using a 0.5% real return, our expense rate would have to drop to 1% to have a similar profile for retirement.

The conclusion, as I have mentioned is that it is critical that we keep our costs to reasonable levels when we are trying to finance our retirement with an investment portfolio.  Costs tend to be certain whereas returns have volatility.  In addition, the first few years are crucial to the results.  If you started investing a few years back, and had a big amount in equity, you may be in a big hole right now and the only sure way to dig out is to work longer and control costs.