1Q2018 | Ages 18 – 29
What to Know About Saving and Investing
There are two key concepts that are useful to know at an early age: compound interest and staying in the market. If you understand these concepts, you will enjoy greater potential for having a long-lasting retirement and a better outcome for you and your family.
Do you know where your income is going to come from in retirement? If you were closer to retirement, you might be able to say Social Security or an old pension. Americans who are further away from retirement might have only their retirement savings to count on (to figure out how much you need to retire, Fidelity has a great calculator.
From an investment standpoint, the benefit of being young is that you have time on your side. With time on your side, the money you are investing now has a greater ability grow until you are ready to retire.
The example below shows two participants investing in their retirement plan from age 25 – 65. They are both making $60,000 a year, contributing 9 percent to their plan, and have an average return of 7 percent over the 40-year span. The only difference is that Employee A invests for 10 years – from age 25 to 35 and Employee B invests for 30 years – from age 35 – 65.
Although Employee B invested a larger sum of money for a longer amount of time, Employee A ended up with a higher end balance through the power of compounding interest. Employee A’s money had a longer amount of time in the market.
Time in the Market
The second, and equally as important, concept is keeping your money invested in the market. Market corrections are a normal phenomenon, and those investors who know the facts, who remove emotion, and who react (or don’t react) appropriately, are normally the biggest benefactors. In times of volatility, it can be very difficult to stay the course and remain disciplined as an investor.
As a participant in a retirement plan experiencing volatility, you need to understand the power of dollar cost averaging: when you contribute money to your retirement plan on a regular basis (every pay period), you are contributing regardless of what is occurring in the markets. You are buying shares when the market is up and when the market is down. In other words, you are buying shares in the market when it is on sale, and when it is retail. For example, the table below illustrates a hypothetical example comparing two investors who started the year investing $200 each month. The investors could be purchasing shares of an individual stock or shares in a stock or bond mutual fund. The first Investor stayed committed to their strategy, while the second investor succumbed to the failed to resist suspending contributions after watching the share price fall for three consecutive months.
|Monthly Investment Investor A||Price Per Share||Number of Shares Used||Monthly Investment Investor B||
Number of Shares Purchased
|January||$ 200.00||$ 10.00||20||$ 200.00||20|
|February||$ 200.00||$ 11.00||18.18||$ 200.00||18.18|
|March||$ 200.00||$ 12.00||16.67||$ 200.00||16.67|
|April||$ 200.00||$ 14.00||14.29||$ 200.00||14.29|
|May||$ 200.00||$ 11.00||18.18||$ 200.00||18.18|
|June||$ 200.00||$ 10.00||20||$ 200.00||20|
|July||$ 200.00||$ 9.00||22.22||$ 200.00||22.22|
|August||$ 200.00||$ 9.00||22.22||$ –||0|
|September||$ 200.00||$ 8.00||25||$ –||0|
|October||$ 200.00||$ 6.00||33.33||$ –||0|
|November||$ 200.00||$ 8.00||25||$ –||0|
|December||$ 200.00||$ 10.00||20||$ –||0|
|Total||$ 2,400.00||$ –||255.09||$ 1,400.00||129.54|
Now that you understand these two key concepts, it is important to think about what path you are on and if you can improve it in any way. Can you increase your deferral? Are you invested appropriately? Do you know if you are on track for retirement? I encourage you to reach out to your financial advisor if you have any questions!
Plan Health Coordinator
Securities offered through Cambridge Investment Research, Inc., “Cambridge,” a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Prime Capital Investment Advisors, LLC. “Prime Capital,” a Registered Investment Advisor. Prime Capital doing business as Qualified Plan Advisors, “QPA,” 6201 College Blvd., 7th Floor | Overland Park, KS 66211 | p: 913.491.6226 | f: 913.491.3214 | primecap-ia.com | Cambridge and Prime Capital are not affiliated.
This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.