It seems like only yesterday, but it was indeed a long time ago that as a summer counselor I was in charge of the archery range at a Boy Scout camp in SoCal. I learned a great deal on the job and one of the things that I always remember is that no matter the goal, you must open your eyes to see a target that you intend to hit. The winds might blow making the job more difficult, but accounting for the changes and the unknown can make the job more interesting too.
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When it comes to investing many of us offer good reasons for not taking action. As a Scout Master used to say, “Would you prefer to offer reasons and excuses for not getting the job done or let the results speak for themselves?” In the belief that you are reading this because you agree that results trump reasons, let’s look a couple of things.
- First, one of the ads on TV these days reports that when looking for a hotel room, the average shopper visits seven sites before determining where to stay.
- Second, from CBS Money Watch, “ the biggest retirement planning mistake of all are the people who spend more time planning their next vacation or car purchase than planning for their retirement and rest-of-life.”
- Third, according to the Employee Benefit Research Institute (EBRI), only 42% of Americans have calculated how much money they will need for retirement.
Your biggest advantage time
So we agree that time used to your advantage is a very good thing, so let’s get to work. We also know that the job won’t get any easier than it is now. Our first case study is a 23 year old female who established as her financial goal to make work optional in 40 years when she will be 63. She would like to have at that time the equivalent of $5,000 per month in 2015 dollars. Given the inflation assumption of 3% we see that in 2055 she will need $16,310. If you were leaving home to go anywhere, however you chose to get there, one thing you would not do is wait for all of the lights to turn green before you left the driveway. You make adjustments even if there is an accident or a flat tire. Sometimes it is the story that comes with the unexpected event that makes the travel even that more interesting than you ever imagined. Among other things, the inflation rate will change. In one study of people who reported they were happy, we find that these folks spend on average 5 hours a year focused on their finances, where they also take the various changes into account.
She can see for the first time that her need is $16,310. With the assumption that she will receive $1,000 from Social Security, the difference is $15,310. The next calculation is the amount of money needed to produce a monthly income of $15,310. We will assume her withdrawal speed limit is set at 4% per year, which means her goal is $4,593,057. If she expected to receive an inheritance this year she would need to invest $211,423 to reach her goal if she averaged 8% per year. That isn’t likely to happen so let’s look at monthly contributions. With the same expected average annual return of 8% per year, she will need to contribute $1,477 a month to reach her destination safely and on time.
Procrastination is the thief of time
Should Jennifer inadvertently elect to wait ten years to begin on her road to financial freedom, all factors being the same, she will then need to set aside $2,458 every month. If she were to wake up and smell the coffee at age 43, about the time that most people begin to plan, she will then need to invest $4,387 a month or almost three times more. Take the guess work out of the equation and begin today to plan your financial success. The EBRI study found that those who determine how much savings they might need are more confident about their ability to retire and stay retired in dignity. If you don’t spend the time now, you may find that there are drastic life changes in your 70’s or 80’s to keep your golden years from turning to rust.These hypothetical examples are intended as an illustration only and do not reflect the performance of any specific investment. They should not be considered financial advice. Securities licensed associates at Investors Advantage are Registered Representatives & Investment Adviser Representatives. Securities and investment advisory services offered through NATIONAL PLANNING CORP. (NPC, Member FINRA/SIPC, and a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies.