Question

Does the return your pension investments earn matter to your financial future? How? How might diversification impact your ultimate success in being able to generate retirement income?

Answer 1

Obviously, return matters. Let's compare $100 invested for 30 years at an expected rate of 5% and 10% compounded annually.

@ 5%, Future value = $100 * (1.05³⁰) = $432.19

@ 10%, Future value = $100 * (1.1³⁰) = $1744.94

This is the effect on $100 only, and now we can imagine the effect of interest rate on our pension funds which is way greater than $100.

With diversification, you manage your risk. All the pension fund invested only in one type of investment might result in something financially dangerous if that investment somehow fails. Instead, a diversified portfolio of investment makes sure of lower risks.

Please do rate me and mention doubts, if any, in the comments section.