The Last Piece of the Puzzle
Three Keys to a Successful Retirement Strategy was created to simplify your retirement planning. Previously, we introduced the three key components and have discussed saving, and understanding volatility at length. Now, in Part IV of this series, we will explore the final key to a successful retirement strategy – the power of time.
How Your Time Horizon Plays a Role in Investment Decisions
Most financial experts agree that understanding time is one of the most essential elements to having a sustainable retirement strategy. A proper “time horizon” offers patient investors several advantages to accumulate long-term wealth they can rely upon once they are no longer working. Yet, how can an individual be certain that they’ve planned far enough ahead? What is considered long-term? Is it a single year? How about 5, 15, or 30 years?
This question is continuously debated, with many opposing opinions from industry leaders. But as a general rule of thumb, industry experts typically agree at least 10 years is considered a reasonable definition of long-term.
That means an aspiring manufacturing entrepreneur in their late 20s or early 30s unquestionably has a long-term investment horizon, and is in the best position to take advantage of long-term investing and the gains that come with it. But what about the 62-year-old business owner who has built an auto parts company from the ground up and is looking to transition out of their company and into retirement in three years? What does their time-horizon look like?
The answer, surprising to many, is that this business owner also has a long-term time horizon. Here’s why: knowledge and technology advances in health care have pushed the average American’s life expectancy to the mid-80s. Yet, this is only the average. Half of Americans will continue to live longer, into their 90s. Therefore, when investing for a successful and financially sustainable retirement, 30 to 40 years is a more prudent time horizon to account for. Unfortunately, many employees and business owners wait to start investing for retirement until they’re in their 40s or 50s, missing out on big market gains. The good news however, is that it is rarely too late to take advantage of the benefits of long-term investing.
Putting Time into Perspective
Realizing your accurate time horizon and investing appropriately can make a big difference in your market gains. Take a look at the chart below as an example. Here, we have illustrated how the length of time affects your overall investment. An initial investment of $100,000 at 5%, 7%, and 9% compounded interest begins showing slight differences around the 10-year mark. By 30 years, a modest 2% difference in yield has almost doubled the result!
Employing this type of long-term active wealth management strategy can pay off significantly for investors over time compared with those who attempt to minimize short-term risk by sheltering their savings in substantially lower-yield bonds and money market accounts.
What to do Next
Understanding time and its role in the markets can be a powerful tool in not only helping you realize your gain, but helping you navigate natural market volatility too. So, when it comes to planning for a successful retirement, let time work its magic – it will help you grow your wealth, and cool off the effects of volatility.