Now that we’re well into autumn, the days are getting noticeably shorter. The change in seasons reminds us that time is passing – and it’s important to use that time wisely. When used well, in fact, time can be your greatest gift in many walks of life – and that’s certainly true when you invest.
To illustrate the importance of time, let’s look at a scenario. Suppose you start saving for retirement when you are 25. If you invest $3,000 per year in a tax-deferred vehicle, such as a traditional IRA, and you hypothetically earn a 7 percent annual return, you will have accumulated more than $640,000 after 40 years, when you reach 65 and are ready to retire. (Keep in mind that you will be taxed on withdrawals.)
Now, though, suppose you wait until you’re 55 before you start saving seriously for retirement. If you put that same $3,000 per year in that same IRA, earning that same hypothetical 7 percent return, you’d only end up with slightly more than $44,000 after 10 years, when you reach 65. And to accumulate the $640,000 you would have gotten after 40 years by contributing just $3,000 per year, you would have had to put in about $43,500 per year for the 10 years between ages 55 and 65.
Clearly, it’s a lot easier to come up with $3,000 per year than $43,500. So, to accumulate the resources you need for a comfortable retirement, you’ll help your cause greatly by saving and investing as early in your working life as possible – and then continue to save and invest right up to, and even during, your retirement years.
The ability to potentially grow your portfolio sizably is the key benefit of using time when you invest – but it’s not the only benefit. You can also use time as a target, or a way to frame a specific investment goal.
For example, suppose you have an 8-year-old child whom you want to send to college in 10 years. When that day arrives, wouldn’t it be nice to know that you’ve been saving money for a decade? One popular college savings vehicle is a 529 plan, which has high contribution limits and allows tax-free withdrawals, provided the money is used only for qualified higher education expenses. (Withdrawals for other purposes will be taxed and may be subject to an additional penalty.)
You can also use time as a signal to adjust your investment strategy. If you’re going to retire in, say, two or three years, you might want to shift some – but certainly not all – of your assets from growth-oriented investments to income-producing ones. As you know, the market will always fluctuate, so you don’t want to be in a position where, once you retire, you need to start taking significant withdrawals – i.e., selling investments –when the market is down. Remember the time-honored rule of investing: “Buy low, sell high.”
When you invest, make the best possible use of time – remember, it’s the one asset that can’t be replenished.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor (member SIPC). Contact Stan at Stan.Russell@edwardjones.com.