Category Archives: Accumulating Wealth

Power of Compound Interest

Posted on by

It is said that Albert Einstein once commented that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

The Power of Compound Interest shows that you can put your money to work and watch it grow. The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process.

When you earn interest on savings and returns on investments, that interest (or returns) then earns interest (or returns) on itself and this amount is compounded monthly. The higher the interest rates, the faster and the more your money grows!

The sooner you start to save, the greater the benefit of compound interest. This is one reason for the success of many investors. Anyone can take advantage of the benefits of compounding through starting a disciplined savings and investing program.

Yet, compounding interest can be good or bad depending on whether you are a saver or a borrower, respectively.

Three factors will influence the rate at which your money compounds. These factors are:

  1. The interest rate or rate of return that you make on your investment.
  2. Time left to grow or the age you start investing. The more time you give your money to build upon itself, the more it compounds.
  3. The tax rate and when you pay taxes on your interest. You will end up with more accumulated wealth if you don’t have to pay taxes, or defer paying taxes until the end of the compounding period rather than at the end of each tax year. This is why tax-deferred accounts are so important.

Finally, it’s important to resist the temptation of seeking higher interest rates or returns, because higher interest rates and returns always bring higher risk. Unless you know what you’re doing, no matter how successful you are along the way, you always want to avoid the possibility of losing money.

Benjamin Graham, known as the father of value investing, was aware of the risk of ‘chasing yield or return’ when he said that “more money has been lost reaching for a little extra return or yield than has been lost to speculating.”

References:

  1. https://www.primerica.com/public/power-compound-interest.html
  2. https://www.thebalance.com/the-power-of-compound-interest-358054

Loss of Purchasing Power: Is $1 million enough for retirement?

Posted on by

“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”

Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago.  There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.

As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.

Retirement is not an age, but a number

Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.

It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.

A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.

Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.

One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money.  For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and  lifestyle.

Taking the financial road less traveled

Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash.  Although this may seem the less risky road to take in your retirement years, a few experts do not agree.  If you expect to maintain your purchasing power into future, you must stay invested in stocks.

“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”

“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.

According to the article, there are five circumstances when retirees should eskew conventionl wisdom:

  1. The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
  2. If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
  3. When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power.  Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
  4. If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
  5. For historical purposes. The stock market has outperformed all other asset classes over the last century.

In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.

Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds.  Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.

References:

  1. https://www.fool.com/ext-content/is-1-million-enough-for-retirement/
  2. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/worried-about-retirement-pimcos-plan-to-help-retirement-savings-last-a-lifetime
  3. https://money.usnews.com/investing/articles/2017-07-24/5-reasons-to-stay-in-the-stock-market-in-your-60s
  4. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/income-to-outcome-pimcos-retirement-framework
  5. https://money.usnews.com/money/blogs/on-retirement/2011/03/22/why-retirement-is-not-an-age

Staying Invested in the Stock Market

Posted on by

“The stock market is the only market where the goods go on sale and everyone becomes too afraid to buy.”  Nerd Wallet

When the market dips even a few percent, as it often does, many retail investors become fearful and sell in a panic, according to Nerd Wallet. Yet when stock prices rise, investors beomce greedy and plunge in headlong which is the perfect definition for “buying high and selling low.”

Here are the three popular fairytales investors tell themselves regarding investing:

  1. Wait until the stock market is safe to invest – This excuse is used by investors after stocks have declined, when they’re too afraid to buy into the market. But when investors say they’re waiting for it to be safe, they mean they’re waiting for prices to climb. So waiting for (the perception of) safety is just a way to end up paying higher prices, and indeed it is often merely a perception of safety that investors are paying for. Fear drives the behavior and psychologists call this behavior “myopic loss aversion.” That is, investors would rather avoid a short-term loss at any cost than achieve a longer-term gain.
  2. Buy back in next week when the stock market is lower – This excuse is used by would-be buyers as they wait for the stock to drop. But as the data shows, investors never know which way stocks will move on any given day, especially in the short term. Both fear and greed drive this behavior. The fearful investor may worry the stock is going to fall and waits, while the greedy investor expects a fall but wants to try to get a much better price.
  3. Bored with this stock, so I’m selling – This excuse is used by investors who need excitement from their investments. But smart successful investing is actually boring. The best investors sit on their stocks for years and years, letting them compound gains. All the gains come while you wait, not while you’re trading in and out of the market. Investor’s desire for excitement drives this behavior.

The key to long term investment success is creating a plan, sticking to the plan and remaining in the stock market through “thick and thin”. Your length of “time in the market” is the best predictor of your investing performance. Unfortunately, investors often move in and out of the stock market at the worst possible times, missing out on performance and annual return.

“The secret to making money in stocks? Staying invested long-term, through good times and bad.”  Nerd Wallet

In a nutshell, more time in the stock market equals more opportunity for your investments to increase in value. The best companies tend to increase their revenue and profits over time, and investors reward these greater earnings with a higher stock price. That higher price translates into a higher total return for patient and disciplined investors who own the stock.

References:

  1. https://www.nerdwallet.com/article/investing/make-money-in-stocks

The National Study of Millionaires

Posted on by

“Anyone in America can build wealth. The only thing holding you back is you. Get out of debt. Save consistently. Keep your spending in check. Let time and compound interest do their magic. If you’re willing to work hard and keep the long-term goal in mind, you’ll reach the million-dollar milestone.” Chris Hogan

Summary

  • “The National Study of Millionaires” is the largest survey of millionaires ever with 10,000 participants.
  • Eight out of ten millionaires invested in their company’s 401(k) plan.
  • The top five careers for millionaires include engineer, accountant, teacher, management and attorney.
  • 79% of millionaires did not receive any inheritance at all from their parents or other family members.

The National Study of Millionaires by Ramsey Solutions concluded that millionaires successfully accumulated wealth through consistent investing, avoiding debt like the plague, and smart spending. No lottery tickets. No inheritances. No six-figure incomes.

Thus, according to the survey, there is positive news for Americans who may have lost hope that they can ever accumulate wealth. “The people in the study became millionaires by consistently saving over time. In fact, they worked, saved and invested for an average of 28 years before hitting the million-dollar mark, and most of them reached that milestone at age 49.”

The study’s results demonstrated a dramatic difference between how Americans think wealthy people get their money and how they actually earn and spend their money.

In a nutshell, regular, consistent investing over a long period of time is the reason most of the people in the survey successfully accumulated wealth. And, even when millionaires don’t have to worry about money anymore, they remain careful about their spending. Ninety-four percent of the people studied said they live on less than they make. By staying out of debt and watching expenses, they’re able to build their bank accounts instead of trying to get out of a financial hole every month.

7 Investing Principles

Posted on by

The fundamentals you need for investing success.  Charles Schwab & Co., Inc

1. Establish a financial plan based on your goals

  • Be realistic about your goals
  • Review your plan at least annually
  • Make changes as your life circumstances change

Successful planning can help propel your net worth. Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.

A financial plan can help you navigate major life events, like buying a new house.

2. Start saving and investing today

  • Maximize what you can afford to invest
  • Time in the market is key
  • Don’t try to time the markets—it’s nearly impossible.

It pays to invest early.  Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.

Don’t try to predict market highs and lows. 2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.

3. Build a diversified portfolio based on your tolerance for risk

  • Know your comfort level with temporary losses
  • Understand that asset classes behave differently
  • Don’t chase past performance

Colorful quilt chart showing why diversification makes long-term sense. The chart shows that it’s nearly impossible to predict which asset classes will perform best in any given year.

Asset classes perform differently. $100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

4. Minimize fees and taxes; eliminate debt

  • Markets are uncertain; fees are certain
  • Pay attention to net returns
  • Minimize taxes to maximize returns
  • Manage  and reduce debt

Fees can eat away at your returns. $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save roughly $13,000.

5. Build in protection against significant losses

  • Modest temporary losses are okay, but recovery from significant losses can take years
  • Use cash investments and bonds for diversification
  • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses

Diversify to manage risk. Investing too much in any single sector or asset class can result in major losses when markets are volatile.

6. Rebalance your portfolio regularly

  • Be disciplined about your tolerance for risk
  • Stay engaged with your investments
  • Understand that asset classes behave differently

Regular rebalancing helps keep your portfolio aligned with your risk tolerance. A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.

7. Ignore the noise

  • Press makes noise to sell advertising
  • Markets fluctuate
  • Stay focused on your plan

Progress toward your goal is more important than short-term performance. Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

References:

  1. https://www.schwab.com/investing-principles

6 Habits to Build Wealth

Posted on by

“If your goal is to become financially secure, you’ll likely attain it…. But if your motive is to make money to spend money on the good life,… you’re never gonna make it.” Thomas Stanley and William Danko

Your financial independence is far more important than showing off your wealth, according to authors of Millionaire Next Door, Thomas Stanley and William Danko. They assert that millionaires frequently remind themselves that those who spend all their income on high-priced luxury items often don’t have much accumulated wealth to their names and tend to live on the paycheck to paycheck treadmill.

Yet, many paths exist to building wealth which have little to do with wages and income. Wealthy people tend to practice daily habits that are designed to protect and grow their assets and help keep their body and mind in balance, according to financial experts who’ve studied subject.

They have found over and over again that you don’t have to be a high-income one-percenter to be wealthy. Many wealthy individuals never made more than $60,000 to $70,000 per year, but did a very good job of managing their expenses, cash flow and spending behavior. “Many people who live in expensive homes and drive luxury cars do not actually have much wealth”, according to Thomas and Danko. “Then, we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighborhoods.”

Wealthy individuals generated several million dollars of net worth, simply because they started financial planning early in life, they saved as aggressively as they could afford to, and they invested that money in assets and stayed invested over the long. In short, “one of the reasons that millionaires are economically successful is that they think differently.”

Live Below Your Means and Practice Gratitude

“Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.” Thomas Stanley and William Danko

Related to not showing off your wealth, authors Stanley and Danko found that the vast majority of millionaires didn’t spend a lot of money and were grateful for things they did own and the lifestyle they lived. In fact, they spent well below their means given their fortunes. In addition, the majority of the wealthy reported that they created and followed a personal budget, and created and maintain a gratitude journal. In other words, they respected their wealth, kept their spending on a tight leash and practice gratitude daily.

There are a few key habits of building wealth:

  1. Remember to pay yourself first. Basically, paying yourself first is about having your financial and budgeting ducks in a row. One key to building wealth is creating a budget and sticking to it. Wealthy people know how to hold the line on discretionary spending items that can help them increase the “invest” portion of their monthly budget.
  2. Look ahead at your goals. Wealthy people typically set concrete goals, both personal and financial, and have a long-term focus that looks years, if not decades, down the road. The more specific the goals and the longer term the goals are, the better. The wealthy understand that it begins with setting personal goals—what you want to get out of life and how you might prioritize your list. And once you have an idea what you want to accomplish personally, you can plot a financial road map to help steer you there. In other words, the path to wealth involves starting early, and focusing on the long term.
  3. Do your homework; keep your cool. Markets go up, and markets go down—often suddenly and for no apparent reason. Define your comfort level with risk, keep your emotions in check, and recognize what you can and can’t control. According to Siuty, there’s no “secret sauce,” except that, to build wealth, it helps to “stay disciplined, be methodical, and not let emotions get the better of you.”
  4. Lead a non-lavish lifestyle. Despite the popular characterization of rich people throwing money wantonly around in movies and TV, in reality, wealthier folks actually tend to look for value in their purchases. They generally understand the difference between price and value. In other words, they’re not afraid to open the pocketbook, but they tend to expect value in return.
  5. Always expand your education. Education is one of the keys to success, and reading is one of the most efficient ways to learn. According to Thomas Corley, author of Rich Habits: 67% of the rich watch TV for one hour or less a day. Only 6% of the wealthy watch reality shows, he wrote, while 78% of the poor do. And, 86% of the wealthy “love to read,” with most of them reading for self-improvement.
  6. Get up early, eat healthy, exercise. The wisdom that “time is money” goes all the way back to Benjamin Franklin, so it’s no surprise that the wealthy tend to wake early and make the most of their time. The other aphorism the wealthy take to heart is “health is wealth.” According to Corley, 57% of wealthy people count calories every day, while 70% eat fewer than 300 calories of junk food per day. Some 76% do aerobic exercise at least four days per week.
  7. Practice Gratitude. Gratitude makes people more optimistic and positive. It improves relationships, which is strongly correlated with financial success, as well as health, happiness and longevity. And, grateful people are less likely to purchase things they don’t need and that can help them save more! The bottom line is this: It doesn’t matter how much you have if you don’t appreciate it! Without gratitude, you’ll never feel successful and wealthy, no matter your net worth. So regardless of your level of financial success, practicing gratitude is essential.

Seeking a life of balance in mind and body, creating measurable goals, and prioritizing saving and investing, can help put you on the right path, and help keep you from straying from that path. And the earlier you start, the better.

References ‘

  1. https://tickertape.tdameritrade.com/personal-finance/behavior-wealthy-habits-rich-16001
  2. https://brandongaille.com/the-millionaire-next-door-summary/
  3. https://www.fool.com/investing/best-warren-buffett-quotes.aspx
  4. https://partners4prosperity.com/thank-and-grow-rich-gratitude-and-wealth/

Summary of “Four Pillars of the New Retirement” | Edward Jones and New Wave

Posted on by

“Retirement is a time to relaunch, reengage and reinvent. It’s about doing things and giving back in ways that you weren’t able to do in the previous decades of your life.” – Kerry Hannon, Author of Never Too Old to Get Rich

Key insights from “Four Pillars of the New Retirement”, by Edward Jones and New Wave include:

  • Nine in ten Americans feel that there should be more ways for retirees to use their talents and knowledge for the benefit of their communities and society at large
  • Almost 70% of those who plan to retire in the next 10 years say they have no idea what their healthcare and long-term care costs will be in retirement
  • Twenty-four million Americans have provided financial support to adult children due to the COVID-19 pandemic
  • Seventy-one percent of retirees are willing to provide financial support even if it jeopardizes their own financial future
  • Alzheimer’s and mental decline are the most feared health conditions of later life among retirees, ranking higher than COVID-19, cancer, heart attack and stroke

The new retirement is becoming an exciting and fulfilling stage of life—full of new choices, new freedoms and new challenges. The timing, shape and meaning of retirement are transforming. Once viewed as a time to wind down, retirement is increasingly a time of new choices, new freedoms, new purpose and new challenges. Recent research continues to reveal that, more than ever before, retirement is far more than a destination or an end point; it’s the beginning of a new journey filled with new twists and turns as well as new possibilities and new questions.

What makes today’s retirement “new”? Increasing longevity means more people with longer retirements—making retirement a more important stage of life. Two-thirds of all the people who have ever lived past the age of 65 in the entire history of the world are alive today, according to the information calculated by Age Wave in 2016.

Four Pillars of Retirement

There are four areas (dubbed the Four Pillars) that impact the quality of life in retirement: health, emotional well-being, purpose and finances. Achieving your ideal retirement requires thought and action about each of these pillars, according to Edward Jones.

All working people, especially pre-retirees, need to understand that the quality of their lives in retirement is rooted in what they do to improve their health, their relationships with family and friends, their sense of purpose, and their finances long before they retire. Then, in retirement, they must continue to learn how to improve and integrate the four pillars.

While in previous past decades, retirement often focused on the end of work and winding down.  However, today’s retirees see themselves as having more freedom – freedom from many work and family responsibilities, and freedom to explore new options and pursue new interests such as travel and hobbies.

All four pillars are essential. Each plays a significant role in the overall well-being of retirees. Those who report having higher quality of life also grade themselves higher in terms of health, family relationships, sense of purpose and finances. And those reporting lower quality of life grade themselves lower in each of the four pillars. Individually and collectively, these four pillars enable people to thrive in the new retirement.

Pillar 1: Health

“Many Americans view retirement as a time to improve their health—in mind, body and spirit”…and, “it’s never too late to improve your health.”

Health influences all facets of life in the new retirement: where retirees live, whether and how they can work, how they spend their leisure, how much they can enjoy themselves and their families, and how much they can volunteer or take part in activities that give them a sense of purpose. Being healthy can also help protect retirement savings from the rising out of-pocket costs of health care and long-term care.

Part of what’s new about retirement is a longer lifespan and more years in this life stage. Good health offers choices. Unfortunately, most adults spend 10 years in poor health. The most feared condition in America is Alzheimer’s and other forms of dementia.

90% of Americans older than 50 say that being healthy is about being able to do the things you want.

Physical health naturally declines with age, but research shows that mental health psychological and emotional—actually rises. Overall, our health-spans do not match our lifespans, with older Americans living an average of 10 years in poor health. And cognitive or “brain” health is of supreme importance and worry for retirees. Alzheimer’s and other forms of dementia are the conditions they fear the most—more than cancer, a heart attack, or even infectious diseases like COVID-19.

Pillar 2: Emotional Well-Being

“Positive, meaningful and supportive relationships with friends and family are critical to health and quality of life in retirement.” Linda Fried, MD, MPH, Dean of the Mailman School of Public Health at Columbia University

Retirees consistently say family and friends are their greatest source of satisfaction, support, joy, and even purpose. Spending time with family— often grandchildren in particular—is always high on the retirement agenda. Families today are becoming more connected and interdependent, and the COVID-19 pandemic is bringing them closer still.

On the one hand, adults 50+ worry about becoming a burden on their families and friends. On the other hand, they are willing to offer financial support to family regardless of how it affects their future.

72% of retirees say being a burden to their family is one of their top fears, but one in four Americans older than 65 have not discussed their end-of-life care preferences with anyone at all.

Most retirees draw their greatest nourishment from family relationships. And for most Americans today, family extends beyond blood relatives to include “families of affinity.” Generational generosity is the rule, with retirees willing to do whatever it takes, personally and financially, to support family members in need, even when it means sacrificing their own financial security. Retirees without close connections to family and friends face greater risk of physical and social isolation.

Pillar 3: Purpose

“Purpose is feeling like the world needs you as much as you need it, that you have something to contribute and that you still matter.”

Purpose is inextricably linked with the other pillars, especially family and health. Retirees with a strong sense of purpose are happier and healthier, more active and more socially engaged, and they live longer.19 They have positive attitudes toward their own aging and life itself. They reject the ageist myth that retirement means a life in decline, instead making retirement the most meaningful and fulfilling time of their lives. They want to feel useful more than youthful. Retirees say their greatest source of purpose is from spending time with loved ones. They also value learning and growing. Yet now, with more than seven hours a day of free time, one in three new retirees struggles to find purpose in retirement.

89% of Americans feel there should be more ways for retirees to use their talents and knowledge for the benefit of others.

Retirees with a strong sense of purpose are happier, healthier and live longer. They report deriving their strongest sense of purpose from spending time with loved ones. They also face a new challenge and opportunity: how to use their newfound “time affluence.” They don’t just want to keep busy; they want to spend their time in useful and rewarding ways. And a striking 89% of all Americans agree that there should be more ways for retirees to help in their communities

Pillar 4: Finances

“Financial planning is about much more than money. It’s how you want the money to work for you, and what is most important for your life.” Dori Mintzer, Retirement Coach, Author and Speaker

The word “wealth” derives from the Middle English word “wele” for “overall well-being.” That’s a great reminder of the fundamental role of finances in people’s lives. For retirees, money isn’t an end in itself, but an essential means to the end of achieving wellbeing in retirement. Nearly half of retirees (46%) say the primary purpose of money in their lives is to provide security for the unexpected.

The role of money in retirement is to provide security and freedom. Over half of retirees wish they had budgeted more for unexpected expenses. When it comes to the unexpected, the cost of health care is more worrisome than a recession.

Two-thirds of Americans who plan to retire in the next 10 years say they have no idea what their health and long-term care costs will be in retirement.1

The financial goal of the vast majority of retirees is not to accumulate wealth in itself, but to have sufficient resources and cash flow to provide security and the freedom to live the lives they want. Many retirees find that managing money in retirement can be even more challenging than saving for it. Even in today’s volatile market, retirees’ greatest financial worry is the cost of health care and long-term care. The key to financial preparation is looking holistically at how one wants to live in retirement, not just how much money may be needed.

These four pillars are inextricably interconnected. Social relationships and sense of purpose can dramatically impact health. The greatest source of purpose comes from spending time with family. Retirees commonly support adult children and other family members financially — or are supported in return. Healthcare costs are a financial worry, and financial stress can negatively impact health. Sound health and finances enable retirees to engage in the relationships and purposeful activities they value most. The list of interconnections goes on. Each pillar influences the others, and together they are mutually reinforcing.

Takeaways

There are valuable lessons that can make for a better life in retirement. Research by Edward Jones and New Wave shows that there are four key ingredients—four pillars—to living well in the new retirement: health, family, purpose and finances. They are highly intertwined, and must be viewed and addressed holistically. They also change in retirement, so retirees need to continually recalibrate and adjust.

Retirees with higher quality of life more often view retirement not as a time to rest, as more of the same, or as the beginning of the end, but as an exciting new chapter in life. They don’t think of retirement as a destination, but a journey. They start imagining, planning for, even practicing retirement activities in advance of declaring themselves retired.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/retirement/new-retirement
  2. https://www.edwardjones.com/sites/default/files/acquiadam/2021-01/Edward-Jones-4-Pillars-US-report.pdf
  3. https://agewave.com/the-four-pillars-of-the-new-retirement/
  4. https://www.edwardjones.com/us-en/market-news-insights/wellness

3 Ways to Start Investing in the Stock Market With $100 or Less | Motely Fool

Posted on by

“One of the best ways to build wealth over time is to invest!”  The Motley Fool

The stock market is a fantastic tool to build wealth.  If you don’t have much money to spare, The Motley Fool video below explains how to start investing with just $100 or less.

Investing is a marathon

Posted on by

Investing is a marathon and learning how investing in stocks can help you accumulate wealth is important to your financial

Long-term investing is a marathon and is the best way, by far, to build wealth that stands the test of time. It’s how you plan for financial freedom, retirement and build a legacy to pass on to your children and grandchildren. Long-term investments require patience and time measured in decades, but have the potential to pay off with high returns.

Investing is the act of purchasing assets – such as stocks or bonds or real estate – in order to move money from the present to the future. However, the conversion of present cash into future cash is burdened by the following problems:

  • Individuals prefer current consumption over future consumption: delayed gratification is hard for most people and, all things being equal, we would rather have things now than wait for them.
  • Inflation: When the money supply increases, prices also often increase. Consequently, the purchasing power of fiat currency decreases over time.
  • Risk: The future is uncertain, and there is always a chance that future cash delivery may not occur.

To overcome these problems, investors must be compensated appropriately. This compensation comes in the form of an interest rate, which is determined by a combination of the asset’s risk and liquidity and the expected inflation rate.

The steps to investing and building wealth involve a series of small decisions that move you along a financial path, one building block at a time over a long period of time. The steps begin with believing that attaining wealth is possible, and a clear intention to start investing and attaining wealth. After all, making your money work for you and accumulating wealth is not a haphazard occurrence, but a deliberate process, journey and destination.

Once you determine that investing and attaining wealth is a priority, focus your energies on maximizing your income, and saving a portion of it. Investing and building wealth also requires you to make decisions on avoiding potentially destructive forces that erode wealth, such as inflation, taxes and overspending.

Learning to be mindful of where your money has been going and spending wisely by evaluating whether something is a need or just a want will keep more money in your pocket. The bonus from being mindful will help you stop accumulating more stuff and may teach you to repurpose already owned items.

“Successful investing and building wealth are about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns,” says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management.

Invest in stocks.

Your first thought regarding investing in stocks and bonds may be that you don’t want to take the risk. Market downturns definitely happen, but being too cautious can also put you at a disadvantage.

Stocks are an important part of any portfolio because of their long term potential for growth and higher potential returns versus other investments like cash or bonds. For example, from 1926 to 2019, a dollar kept in cash investments would only be worth $22 today; that same dollar invested in small-cap stocks would be worth $25,688 today.

Stocks can serve as a cornerstone for most portfolios because of their potential for growth. But remember – you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

Investing a portion of your savings in stocks may help you reach financial goals with the caveat that money you think you’ll need in three to five years should be in less risky investments. Stock investing should be long-term, understanding your risk tolerance, and how much risk you can afford to take.

The power of compounding

Compound interest is what can help you make it to the finish line. Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

Purchasing power protection

Inflation reduces how much you can buy because the cost of goods and services rises over time. Stocks offer two key weapons in the battle against inflation: growth of principal and rising income. Stocks that increase their dividends on a regular basis give you a pay raise to help balance the higher costs of living over time.

In addition, stocks that provide growing dividends have historically provided a much greater total return to shareholders, as shown below.

Invest for the long term.

Long-term investing is the practice of buying and holding assets for a period of five to ten years or longer. While investing with a long-term view sounds simple enough, sticking to this principle requires discipline. You should buy investments with the intention of owning them through good and bad markets. You should base your investment guidance on a long-term view. For your stock picks, you should typically use a five – to ten-year outlook or longer.

Long-term investments require patience on your part which is a trade-off for potentially lower risk and/or a higher possible return.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

No one can or has accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility and corrections. Staying invested with a strategy that aligns with your financial goals is a proven course of action.

References:

  1. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html
  2. https://smartasset.com/investing/long-term-investment
  3. https://www.bankrate.com/investing/steps-to-building-wealth/
  4. https://www.cnbc.com/2021/02/04/how-we-increased-our-net-worth-by-1-million-in-6-years-and-retired-early.html

Source: Schwab Center for Financial Research. The data points above illustrate the growth in value of $1.00 invested in various financial instruments on 12/31/1925 through 12/31/2019. Results assume reinvestment of dividends and capital gains; and no taxes or transaction costs. Source for return information: Morningstar, Inc. 

Investing Rules of the Road

Posted on by

“Invest for the long term, seek quality investments and manage risk through diversification.”

The market changes every day, but what you want for your future probably doesn’t. The same goes for your investment / financial mindset, strategy and goals.

Your investment / financial mindset, strategy and goals are as unique as the route you take to reach them. But regardless of your course, the following 10 investing “rules of the road”, according to financial-services firm Edward Jones, can help you get where you want to be.

1. Develop your long-term goals and strategy

Determine your long-term goals, investment time frame and comfort level with risk – before deciding on a strategy. The more you can outline and clearly define what you are trying to achieve, the more you can tailor your strategy.

It’s tempting to chase the market, but most successful investors make their money over time, not overnight. Long-term investing with an emphasis on quality and diversification is a proven and time tested course of action.

The best way to build and preserve your financial future is with a long-term approach to investing. That’s why you don’t follow investment fads. But “buy and hold” doesn’t mean “buy and ignore.” You should still review your portfolio at least once a year to make sure you’re on track for the long haul.

Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.

The best investment plan is one that is customized to your lifestyle, so it’s necessary to create an individualized strategy that will set you on the path to success.

  1. Evaluate your current financial standing to understand how much risk you can take.
  2. Determine your goals and how long it will take you to realistically achieve them.
  3. Figure out which types of investments and strategies are the best way to get you to where you want to be.

Having a clear investment plan will give you a ton of clarity as you begin investing. By creating a specific plan, you will be ready to make your retirement goals a reality when that day comes.

2. Understand the risk and your risk tolerance

As a rule, the higher the return potential, the more risk you’ll have to accept. To determine what makes sense for you, you will want to know:

  • What is your comfort level with risk? Understanding this can help you determine how you may react to market ups and downs over time.
  • How much risk are you able to take? The amount of time you have to invest plays an important role in determining how much risk you’re able to take.
  • How much risk do you need to take? Your financial advisor will want to determine the return, and therefore the risk, that may be necessary to reach your long-term goals.

3. Diversify for a solid foundation

Your portfolio’s foundation is your asset allocation, or how your investments are diversified among stocks, bonds, cash, international and other investments. Your mix should align with your goals and comfort with risk.

While diversification can’t protect you against a loss, it can help reduce your risk. If your money is invested in just one or a few investments, and one of them struggles, your entire financial strategy could be in trouble. So most financial advisors recommend building a portfolio that includes different types of investments that perform differently over time.

4. Stick with quality

Believe in long-term investing with an emphasis on quality and diversification. Of all the factors to consider when investing, quality is one of the most important factor. It’s also one of the most overlooked. Although it may be tempting to buy a popular investment, it may not fit with the rest of your portfolio, and it may be riskier than you expect. If it sounds too good to be true, it probably is.

5. Save and Invest for the long term

It’s tempting to chase the market, but despite stories of fortunes made on one or two trades, most successful individual investors make their money over time, not overnight. One of the biggest mistakes you can make is trying to “time” the markets.

Timing the market is difficult or simply impossible for even the most seasoned professional investors and smart money. Rather than waiting for the best time to invest, it can often be a better idea to just take the plunge into the market and get invested. Waiting for the best time will lead to a lot of missed opportunities.

6. Establish realistic expectations

You’ll need to determine the return you’re trying to achieve – which should be the return you need to reach your long-term goals. Then you can base your expectations on your asset allocation, the market environment and your investment time frame.

The average stock market total return (e.g. S&P 500 historical returns), from 1950 to 2020 was 8.9%.

7. Maintain your balance portfolio and asset mix

Your portfolio’s mix could drift from its initial objectives from time to time. You can rebalance to reduce areas where your investments are overweight or add to areas where they are underweight. By rebalancing on a regular basis, you can help ensure your portfolio remains aligned with your objectives and on track to reach your long-term goals.

8. Prepare for the unexpected

When things are going well, emergency savings can seem unimportant. But in addition to your regularly occurring expenses, like rent/mortgage and utility bills, you’ll often deal with unforeseen events and unexpected costs.

Unforeseen events can derail what you’re working so hard to achieve financially. By preparing for the unexpected and building a strategy to address it, you’ll be better positioned to handle the inevitable bumps along the way.

No one wants to think about car breakdowns or job loss. But as much as we’d like to avoid thinking about them, emergencies do happen. Building an emergency savings account that is dedicated to handling unexpected costs is important.

9. Focus on what you can control

You can’t control market fluctuations, the economy or the political environment. Instead, you should base your decisions on time-tested investment principles, which include:

  • Diversifying your portfolio
  • Owning quality investments
  • Maintaining a long-term perspective

Additionally, taking control of your spending habits and weighing them against your dreams for the future can determine how to align your spending goals. Perhaps you might decide that it’s more important for your family that you retire by a certain age, and you could drive one car for a longer time or cut back in other areas. That way, more money would be available to make that bigger dream a reality.

If you have “bad” debt from credit cards and high interest personal loans that will get you in trouble with interest payments, pay that off before you put money in the stock market. 

Don’t fall into the common money traps of trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house. These are money traps because they are things that will take all your money so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.

10. Review your strategy regularly

The one constant you can expect is change. That’s why it’s so important that you review your strategy on a regular basis. You should still review your portfolio at least once a year to make sure you’re on track for the long haul.

Realizing your dreams starts with smart investing. By regularly reviewing your strategy and make the adjustments you need, you can have a clearer picture of where you stand and what you need to do to help reach your goals.

No matter what your path forward looks like, tailor your strategies – so you can see the road ahead and move forward with confidence.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/personal-finance/investing-strategies/investing-rules
  2. https://www.edwardjones.com/us-en/why-edward-jones/investing-approach/investment-philosophy
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/get-started-investing-with-these-10-steps/