Good Things Come to Those Who Wait—Especially When You Start Early

August 9, 2017 | Ben Lemoine

Photo of a happy couple anticipating their retirement.

Instant gratification is the new norm nowadays. When we need to go somewhere, we call Uber; when we’re hungry, we order food from our favorite restaurant and have it delivered; when we need a household item we forgot at the store, order it on Amazon and get it almost instantly. The desire to experience or fulfill a need without delay has become an exigency. Sayings like “patience is a virtue” or “good things come to those who wait” are becoming a distant reality in our everyday lives. For this reason, retirement planning can be a real struggle and something that we put off for years before we realize we should have started a long time ago.

Starting to invest for retirement in your early 20s can be the wisest financial decision of your life. If managed properly, time can be the biggest contributor to our retirements, but when not enough time is attributed to our retirement planning, it can also be the biggest inhibiter. This has everything to do with the law of compounding. If you start early, the effects of compounding can be huge. For example, suppose you start setting aside $1,000 a year when you’re 25 and you put it in a retirement account earning 7% a year. Even if you stop investing completely when you turn 35, and only invested for 10 years, your total investment will have grown to nearly $113,000 by the time you turn 65.

Now if you were to start investing at the age of 35 instead of 25, and you invest $1,000 every single year until you turn 65, you will invest $1,000 a year for 30 years. How much do you think you wind up with when you're 65? Only about $101,000. Even though you invested three times as much money—you end up with less. This is the law of compounding. It is the earned interest earning interest every subsequent year. It is extremely powerful when time is on your side. We should all start investing as soon as possible to benefit from compounding.

If your employer offers any tax-advantaged or matched retirement plans, you should invest the maximum possible amount that fits within your budget. If you get started late in your retirement plans, you may need to invest additional money to make up for lost time.

There are typically three main options to save for retirement:

  1. You can invest money into a retirement account that’s offered by your employer, such as a 401(k) or 403(b) plan. These plans allow money to grow tax-free until it is withdrawn in retirement. You also bypass taxes either on the front end or the back end, depending on whether you choose a Traditional or Roth option.
  2. You can also invest in a tax-advantage retirement account on your own, such as an IRA. IRAs offer similar tax breaks to 401(k)s, though some of the eligibility rules differ.
  3. Finally, you can put the money into a regular investment account that doesn't have tax advantages.

The first two options are typically better deals, but there are limits on how much money you can invest in 401(k)s and IRAs each year. If you invest the maximum allowed into tax-favored plans and you want to save even more for retirement (for example, because you got a late start in saving and need to make up for lost time), you can use a regular investment account.

Retirement accounts can have a combination of three main asset classes: stocks, bonds and cash. Stocks and bonds can be purchased individually or via funds, such as an index or mutual fund. Having the right mix of stocks, bonds and cash is called your asset allocation. Mission Federal Credit Union has contracted with CUSO Financial Services, L.P. (CFS). to make non-deposit investment products and services available to Mission Fed members. A CFS Financial Advisor can assist you with asset allocation of your retirement portfolio based on your age, retirement goals and needs.

Many financial professionals recommend limiting a change to your portfolio allocation to once a year. This allows you to rebalance only periodically and it forces you to do what so many investors fail to do: buy low and sell high.

If you’re unsure about asset allocation, the old rule of thumb used to be that you should subtract your age from 100 and that’s the percentage of your portfolio that you should keep in stocks. For example, if you’re 30, you should keep 70% of your portfolio in stocks. If you’re 70, you should keep 30% of your portfolio in stocks. However, with advances in technology and medicine, Americans are living longer and many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because if you need to make your money last longer, you’ll need the extra growth that stocks can provide.

Another option is investing in “hard assets” like real estate or gold. These investments typically carry more risk and require a lot more attention. Make sure you consult with an industry expert before investing in any assets. Hard assets may not be suitable for all retirement accounts, but it is definitely worth discussing with a Mission Fed representative. Visit a local branch or speak with a Commercial Real Estate expert today.

Non-deposit investment products and services are offered through CUSO Financial Services, L.P. a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.

The content provided in this blog consists of the opinions and ideas of the author alone and should be used for informational purposes only. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article by Mission Federal Credit Union is for the information and convenience of its readers and does not constitute endorsement, control or warranty by Mission Federal Credit Union.

Ben Lemoine

Ben Lemoine

Ben Lemoine is VP, Finance and Treasury Manager at Mission Federal Credit Union. He has over 12 years of experience in Investment Portfolio Management, Asset Liability Management, and Capital Markets. Ben received a Bachelor of Business Administration degree in Economics and a Master of Business Administration in Finance, both from the University of Georgia’s Terry College of Business. He also holds FINRA Series 7 and Series 63 licenses. Ben is fluent in French and German.

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