In my previous post, The 20s Money Retirement Plan, we talked about the goal of having a portfolio that pays $260,000 a year in dividends during retirement. 35 years from now, $260,000 a year would be the estimated equivalent of $100,000 a year today (due to inflation).

Today, I want to look at some possible scenarios that would let the average investor reach that goal in 35 years. Are you ready to take the 35 Year Challenge? If so, read on.

The Basic Scenario

A portfolio that pays $260,000 a year in dividends, assuming a 4% dividend yield, has a value of 6.25 million dollars. To go from zero to 6.25 million in 35 years, you would have to do the following:

• Save $10,000 a year
• Annual rate of return of 14.15%

The good news on this basic scenario is that inflation will contribute approximately 3% to your rate of return. The bad news is that most people, especially young people, will have a tough time saving ten grand a year. Even worse, the early savings is actually more important than the later savings (when you’re likely to have more money) since the early money has longer to grow.

Scenario with Higher Return

Since most 20-somethings are unlikely to save ten grand a year, let’s see what it would look like to drop the annual savings and still reach our goal in 35 years.

• Save $8,000 a year
• Annual rate of return of 15.10%

or

• Save $5,000 a year
• Annual rate of return of 17.15%

Scenario With Money Already Saved

If you already have a chunk of money put away for your future due to inheritance or simply proactive saving, this can help in reaching the goal. Let’s look at some examples.

• Starting with $25,000
• Save $10,000 a year
• Annual rate of return of 12.90%

or

• Starting with $25,000
• Save $5,000 a year
• Annual rate of return of 14.72%

or

• Starting with $50,000
• Save $10,000 a year
• Annual rate of return of 12.03%

or

• Starting with $50,000
• Save $5,000 a year
• Annual rate of return of 13.41%

Conclusions

What do these examples mean for you? If you look at all of these examples, you will see that the most important factor in reaching your financial goals is achieving a high rate of return. A high return can compensate for not having a large sum of money given to you by your relatives or not having saved yet in your life. This does not mean you shouldn’t start saving. You can’t earn a return on zero, so you must start saving as soon as possible.

Is it possible to achieve a higher rate of return than the overall market? Most financial advisors and “experts” would tell you that in most cases, it’s not possible. They will tell you that you are better off diversifying your portfolio, eliminating any chance of outperforming the market.

We think that you CAN outperform the market, achieve a high rate of return, and reach your financial goals. It takes work, it takes patience, and it takes keeping your emotions in check. If you aren’t willing to do what it takes, then yes, you are better off diversifying (stick to an index fund).

How to Outperform The Market For 35 Years

I think most investors attempt to follow too many stocks. Find a few forward thinking companies that are poised for growth and then find the right buying opportunities. An example of such a company is Apple (AAPL).

Balance your portfolio with a couple stocks that are poised for growth and have a fantastic history of dividend growth. My favorite stock in this category is Philip Morris International (PM).

Lastly, reserve a chunk of your portfolio to participate in bull markets. For example, a portion of your portfolio should be exposed to energy and other commodities in today’s environment. I love natural gas stocks like Chesapeake Energy (CHK).

Again, don’t try to follow 100 stocks, focus on a select group of stocks that you think have potential for high returns. If you can’t find enough stocks to really focus into, keep some of your money in cash until you find additional buying opportunities. Like we mentioned before when discussing Warren Buffett, it is better to wait to buy than to buy just because we have the money.

A combination of these techniques with a relentless drive to find the best buying opportunities will help you outperform the market, drive sky high returns, and reach your financial goals. Again, knowing when to buy is more important than knowing what to buy. On this site, we continually emphasize the idea that finding right buying opportunities is the path to an outperforming portfolio.

So, are you willing to educate yourself and build your dream portfolio? Take the 35 Year Challenge!

Popularity: 18% [?]