Time — Friend or Foe?
Here’s when time is your foe: when you have only a couple of years left to work and don’t have enough accumulated to retire. And here’s when time is on your side: you start saving in your twenties, save every month, and keep saving until you retire. That’s when you’re putting the power of compounding to work for you. The sooner you start saving, the less you’ll have to put away each month to accumulate the needed funds for retirement. For example, say as a 25-year-old you open an IRA and save $100 a month ($1,200 per year). The IRA earns an average of 6% a year. After 40 years — when you’re 65 and ready to retire — your account balance could grow to over $185,000. But let’s say instead, you put off saving until you are 45. At the same rate of saving in an IRA with the same returns, by the time you’re 65, your IRA balance would be just about $44,000. Starting when you’re 45, you’d have to contribute $420 a month until age 65 to save about $185,000. At least that would be less painful than if you waited until you were 55. Then to match the end result, you’d have to save $1,175 per month. (These examples are provided for illustrative purposes only and are not intended to project the performance of a specific investment vehicle.) One way people often try to compensate for getting a late start in saving is to shoot for a higher rate of return. Instead of settling for the 6% a year we used in the example above, why not go for 10%? But there are two problems with that strategy. The first is investments don’t always provide consistent returns. Second, to earn higher rates of return, you have to take on more risk. That’s fine when the big returns come in; but in the long run, big returns in some years are usually paid for with big losses in others. Not everyone realizes time spent not saving can have a significant cost, and there are only so many ways to make up for it. The sooner you start putting more money aside, the better.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.