Sunday, December 7, 2014

Why is our Net Worth Higher Now Than When We Retired?

It seems counter-intuitive, our net worth is 5% higher now than when we retired about a year ago, why?

It is due to two things:

  1. We are spending about 4% of our net worth according to our budget.
  2. The return on a diversified portfolio in 2014 is over 12%.  For this, I looked at the return on the Vanguard Balanced Fund, which consists of 60% of an index of all US stocks and 40% of an index of US bonds.  Your return may vary, but unless you bought an undiversified portfolio of Russian and Gold stocks, your return will certainly be above 8%.  My return is about 9% because my portfolio is more conservative than Vanguard Balanced Fund.
The thing to bear in mind is that 2014 is not a typical year for market returns,  There will be years when your return will be -9% or something similar.  But if you are disciplined in your spending, the highs will balance out the lows and your probability of running out of money in retirement is low. 

For more detail on how you can plan for retirement with this in mind, see my previous blog post on Monte Carlo simulation.

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