Retirement Investors Must Keep Time On Their Side

by Frank Armstrong III

Time is such a valuable commodity that it’s a shame when investors squander it. Yet many investors do, wasting a resource that can’t ever be recovered.

Time is an investors’ most valuable ally, because the returns will increase exponentially over time, which is as close to magic as most of us will ever see and understand!

To see just how valuable this time element is, consider the case of a 20-year-old wishing to retire at age 60 with $1 million. Assuming an 8% return, future millionaire investors in this category need to only deposit $3,574 per year ($68 a week) to reach that goal.

Over their full 40-year career (using the example above), investors will deposit a total of only $142,969; the balance ($857, 031) will come from the earnings (profits) on their retirement account.

Every day these investors wait to get started costs them in annual deposits, because there will be less deposits over their career span. The longer they wait, the more likely it becomes that they won’t reach their retirement goal.

Avoid These Common Mistakes To Keep Time Working For You

Raiding Your Retirement Account

A disappointingly huge percentage of workers fail to roll-over their pension, and profit-sharing accounts when changing jobs. Instead, they use the funds for everything from vacations to new cars. It’s especially important to keep all of your retirement accounts working for you.

The total amounts may seem relatively small, but if left to accumulate tax-deferred in an IRA, your retirement account will grow to substantial amounts. For instance, $10,000 left to grow at 8% for 30 years will be worth $100,626 when it’s needed for your retirement.

Taking A Flier

Some delusional investors rationalize that a series of high-risk investments will average out over time, and that a loss today can be made up by tomorrow’s gains. These serial losers buy into one deal after another that sounds too good to be true, hoping for a huge payoff. This gambler’s mentality has almost nothing to do with investing, and rarely leads to anything, except financial ruin.

Concentrating Your Investments

Anything less than a fully diversified portfolio magnifies risk without increasing expected return. No investor should ever bear a risk that could be diversified away. They can’t afford for all, or a large portion, of their savings to vaporize. The more concentrated (less diversified) a portfolio is, the more opportunity there is for something awful to happen.

Just ask any Enron employee how he likes his company stock after the Enron scandal. Avoid sector funds, individual stock holdings, and funds with concentrated positions.

Keeping your funds in play with reasonable investment strategies, and constant discipline, is just as important as starting your investing plan as early in life as possible. Blowing your nest-egg up along the way destroys your most valuable ally in the quest for financial independence, and a happy stress-free retirement.

[Frank Armstrong III, CLU, CFP(tm), AIFA(R) is the founder and principal of Investor Solutions, Inc. (www.InvestorSolutions.com), a fee-only registered investment advisor. He holds a B.A. in Economics from the University of Virginia, and designations as Chartered Life Underwriter (CLU), Accredited Investment Fiduciary Analyst (AIFA), and a Certified Financial Planner (CFP) ™. He also has more than 35 years’ experience in the securities and financial services industry.]

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