Part Two of our Financial Planter series this month features Retirement Planning by Guest Blogger, Megan Poore as part of the “Know!” stage:
You’re young, hip and you have your whole life ahead of you. Maybe you’re wondering (but probably not!) whether this is the right time to start thinking about retirement. Let me give you an emphatic YES! The 50-, 60-, and 70-year–olds who I work with often wish they could go back in time and give their 20-something self a few pointers. Gather around, folks, and allow me to share the things your older self would want you to know.
Start early and keep going. The longer your money is invested, the more time it has to grow. Have you ever heard of the rule of 72? If you divide 72 by your expected rate of return, it will tell you approximately how many years it will take for your money to double. Let’s say that an investment sees an average return of 8%. 72 divided by eight equals 9. This means that the value of that investment will double roughly every nine years. That gives you more than four doubling periods between now and your sixties. Think about what this means for someone starting in their twenties instead of waiting until your thirties! If you were to sock away $10,000, you could see it grow to $20,000, then $40,000, then $80,000 and finally over $160,000 without investing more. Continuing to invest throughout your twenties, thirties and beyond means that you will see even more assets piling up to ensure your financial security later in life. The biggest regret your 70-something self will have is not capitalizing early enough on the value of time.
If somebody offers you free money, take it! If you have a 401(k) or other retirement plan through work, odds are good that your company will match your contributions. Take advantage of it. In the case of a 50% match-up to a 4% contribution, this means that for every dollar you contribute, $0.50 will be added, up to four percent of your salary. That is free money! For a $35,000/year salary, your employer would add $700 to your retirement plan balance each year. Granted, it is money that you are not meant to use until you are at least 59.5 years of age (or else the IRS will stick you with taxes and a penalty), but think about what that $700 alone would grow to under the scenario discussed above.
Be willing to take some intelligent risks and remain disciplined. I know the news is full of reasons why people don’t invest in stocks. Maybe your friends, parents and colleagues have negative stories about their experiences in the last decade or so. What I’d like you to consider, though, is again the effect of time, and that with a well-diversified portfolio (e.g. investments in many companies – different sizes, different locations and different business sectors), even when markets dive way down, the losses have always proven temporary, as long as you keep the money invested. Let’s look at some real data. If a 20-something baby boomer had started investing $100/monthly in January of 1973 into the S&P 500 (with reinvested dividends) and continued to invest $100 every single month for forty years, until December of 2012 – that account value would have grown to over $650,000. All that on a $48,000 investment and in spite of scary, but completely temporary, declines in 1973-1974, 1987, 2000-2003, and 2008-2009, just to list a few not so stellar years for stocks in general.
Market downturns happen on a very regular basis. We see a bear market (a downturn of at least 20%) in the S&P 500 about every three and a half years. The key is not in constantly searching for the very best investment strategy, the key is picking a long-term strategy that you understand, that you can live with and that you will have the fortitude to leave in place – even in the midst of the next downturn. Start small, start now! Increase your investment levels when you are able and stay invested. Patience, discipline and faith in the future work! Let us know what you think on Barclaycard Ring's Facebook page!
Bio: Megan Poore is a Financial Advisor at Lucien, Stirling and Gray Advisory Group, Inc. in Austin, Texas. She started investing in her retirement plan at age 21 after receiving some good (and insistent) advice from a colleague.