By Paul A. Merriman, MarketWatch
Let’s assume you and your sister are in good health and can expect to live another 30 years, until you’re 97. Let’s assume also that once you’re retired, you each scale back your investment portfolios to take less risk by investing more in bond funds and less in equities.
And (this is crucial) let’s assume your sister continues for whatever reason to earn 0.5% more than you during retirement.
If your Roth IRA earns 6% during retirement and you continue taking out 4% every year, by your 96th birthday you will have taken out a total of $3.54 million — a huge return on those $5,000 investments you made over the years.
This is the second of the three financial results from your long-term plan.
And your sister? She will have been able to take you out to dinner many, many times during retirement. Her total withdrawals will equal $4.48 million.
So far, that extra 0.5% return has been worth nearly $950,000 to her.
The third financial result from all this is the amount each of you has left on your 97th birthday when (for purposes of this example only) we will assume your lives end.
Your Roth IRA will be worth $3.81 million at that point, making your heirs very grateful for your long-term investment success.
Your sister’s account will be worth $5.16 million, amply rewarding her heirs for that extra 0.5% return over many, many years.
Here’s what could be considered the “final score” between these two portfolios:
• The total of all your retirement withdrawals plus what’s left is $7.35 million.
• The comparable total for your sister: $9.64 million.
That difference — about $2.3 million — resulted from just one thing: the extra 0.5% of return over a long lifetime.
I can’t guarantee you (or your sister, for that matter) will be able to achieve returns of 8.5% or 8% or 6.5% or 6%.
But I CAN guarantee that an extra 0.5% return will make an enormous long-term difference. And I can guarantee you’ll get at least that much extra return (and perhaps considerably more) from doing a few relatively simple things that are under your control.
Here are three places to get that 0.5% advantage.
• First, invest in mutual funds with lower expenses. A typical actively managed fund charges annual expenses of 1%. A typical index fund charges much less than one-half that amount. Check.
• Second, bump up your portfolio’s equity allocation by 10 percentage points. Over the past half a century, for example, a switch from 50% in equities to 60% has added more than 0.5% in extra return. Check.
• Third, invest in the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.14% , but add equity asset classes that have long histories of outperforming that index with little or no extra risk. Here’s an easy and very effective way to do that. And here’s an even simpler way .
That third step is called diversification, and it’s one of the smartest things investors can do.
Just these three simple steps, all completely within your control, will make a huge difference in the long term. As these numbers show, little things can mean a lot. Guaranteed.
Richard Buck and Daryl Bahls contributed to this article .