Time: Friend or Foe?
Here’s when time is your foe: when you have only a couple of years left to work, and you 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.
The sooner you start saving, the less you’ll need to put away each month to accumulate the needed funds for retirement. For example, as a 25 year-old you open and 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 would be just about $44,000. Starting when you’re 45, you’d have to contribute $420 a month to save about $185,000. At least that would be less painful than if you waited until you are 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 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%? After all, that is roughly the long-term return on stocks in the S&P 500 (Source: Market Results for Stocks, Bonds, Bills, and Inflation, 2015). But there are two problems with that strategy. The first is that stocks 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 paid for with big losses in others. Whenever you absorb a big one-year loss, it takes a higher-than-normal rate of return in following years to break even.
Please call if you’d like to discuss this in more detail.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.