The old saying about “not worrying about things we can’t control and concentrating on those we can control” applies to retirement planning and investing.
There are two levers an investor can directly control: how soon and how much you save. By focusing on these two levers, an investor has a higher probability of successfully preparing for retirement than by trying to pull other levers, such as trying to beat the market or trying to predict when to be in or out of the markets.
Starting to save early in a career makes a big difference. For instance, someone who saves $800 monthly beginning at 45 years old and who puts their deposits into a blended portfolio of stocks and bonds, which earns an average annual compounded return of 6%, ends up with a hypothetical $353,000 at age 65.
But someone who starts saving half that amount (only $400 monthly) at age 25 and never increases their savings rate (even though their income will increase over their career) ends up with a hypothetical $743,000 at retirement, more than twice the amount saved by the late starter.
In order to catch up, the late starter would either have to increase their savings rate, delay their retirement or take on more risk in an attempt to earn higher returns.
Higher savings rates can have a more positive impact on wealth accumulation than shifting to a more aggressive portfolio. Most of us do not have the courage to invest in a more aggressive 100% stock investment portfolio. When stock markets decline, people may unsuccessfully attempt to time the markets, or they may become frightened and stop making deposits.
Remember, you do not control the markets or the markets’ returns. But you do control how much you invest from each paycheck and how soon you start. Start early, and as your income increases, gradually increase the percentage that you invest into your long-term investment portfolio.
For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.
