Don’t Reason Away Your Retirement
July 1, 2015 | Peter J. LaBella, CFP®
As Published in the Patriot-News
Anyone past a certain age knows that getting older can be challenging, but doing so without enough money is even worse. So, even if up to this point you have been the fabled, happy-go-lucky cricket, fiddling away your life, while the industrious ant saves up for the long winter – it’s not too late for you to prepare for your future and the goal of remaining economically flexible, while you take the opportunity to slow down.
Pay Yourself First
At the core of being successful in providing for your financial future is NOT how much you make, but rather managing what you spend. Many people sabotage their financial security because they fail to get into a habit of setting aside money each month – no matter how small.
It’s important to consistently “pay yourself first” by setting aside your investment funds BEFORE you pay the bills and other debts. Consider preparing for your future like a bill in your life that needs to be paid. It’s OK to start small. Just keep at it until it becomes an ingrained habit.
Reasoning Away Your Retirement
Often the obstacles to financial security after retirement are self-imposed. Many investors who fail to adequately prepare for the future “reason away their retirement.” Reasoning away your retirement sounds like any one of these all-too-familiar refrains: “We need to buy a flat screen TV.” “Inflation is really cutting into our budget.” We are all guilty of confusing material wants with real needs, much to our economic detriment. All of the reasons for short-term spending decisions – however valid they seem at the time – push you further away from your dreams and long-term goals.
Take A Deep Breath – It Will Pass
The third factor that interferes with successful investing is human nature. Investing is an anathema for investors. Stock market volatility is challenging for all investors to cope with.
The 24-hour business news cycle exacerbates the challenge since negative prognostications are constantly featured and believed by investors. When markets are good, as they have been in 2013, with the S&P 500 index up 32%, we are conditioned to ask “how long this can last?” When markets are falling, as they were in 2008, we are again conditioned to believe the setback is permanent.
In all of these situations, where we want to preserve capital, three decisions must be made. 1.) When to sell, 2.) Where to place the proceeds, and 3.) When to return to my investments. It is extremely difficult to be right all three times. Staying the course is difficult; emotions tend to override our game plan. The stock market pays us for living with and experiencing volatility which is very difficult.
Let’s keep in mind guarantees have a cost, higher returns come with higher risk. Currently we are in a low interest rate environment and cash and interest bearing instruments are currently losing spending power to inflation.
Compounding Builds Wealth
There is an urban legend that Albert Einstein once said compounding interest is the most powerful force in the universe. Einstein may not have said this, but it’s certainly true, especially if we expand that to include both interest and dividends. Upon his death in 1790, Benjamin Franklin provided 1,000 pounds, equivalent to $4,444 today, to fund two trusts for the cities of Philadelphia and Boston. When distributed in 1990, the Philadelphia trust was worth $2,256,952 and the Boston trust, which was never invaded for interest, was worth nearly $5,000,000.
What is compounding and why is it such a powerful investing tool? Compounding is when interest or dividends are reinvested in order to generate their own earnings. Put simply, your money makes more money. It is a simple and effective way of building wealth. The trick is that you need to leave the money alone and let it grow. Compounding has a snowball effect on your investments; provided that you let the accumulated funds grow.
The other enemy that torpedoes building a substantial retirement portfolio is procrastination. When you delay in adding money to your portfolio, you forfeit the number one wealth building tool – compounding. If you have no investments, you can’t benefit from the compounding factor that helps increase the value of your portfolio exponentially over the years.
Compounding helps increase the value of any portfolio – even during declines and the recent recession. Investing is about having patience, despite the obstacles that may hinder your expectations about the rate that your portfolio will appreciate. Some investment obstacles are out of your hands. But the vast majority of factors are within your control, so start taking steps to make sure your future is secure today.
Peter J. LaBella, CFP® is a financial advisor and the founder of FMA Advisory, a federally licensed, fee only asset management firm that provides independent investment advice for individuals, businesses and retirement plans. Mr. LaBella can be reached at 800-451-4628 or firstname.lastname@example.org.