Tuesday, October 9, 2012

The Need to Save and Invest

During our working years, we need to save a portion of our earnings in order to assure ourselves years of a secure and financially trouble free retirement.

How much we need to save each year depends on how long we will be saving and how much we will earn on those savings, as well as how long we will work in relation to how long we will live after retirement. The best advice is to start saving early and bet on America's private sector success over the long haul. So save lots and buy stocks. But most important, start saving early.

Of course, that means avoiding burdensome debts in our younger years to the extent possible. In the early years, it's far better to be able to save and invest our earnings than to have to pay off loans with those earnings.

How to Restore Confidence in the Financial Markets is an excellent editorial by Larry Fink, CEO of the investment firm BlackRock. Here's what he has to say about saving and investing for our retirement years:

"Virtually every developed nation today suffers from the reluctance of investors and CEOs to invest in new businesses, jobs or ideas. Investors have adopted a wait-and-see attitude because markets are missing the two components essential for confidence: trust and certainty.

Investors large and small are angry and cynical. . . . Those who stayed the course over the 10 years through 2009 suffered a "lost decade," with negative total returns on the S&P 500. Investors see little consensus in government for tackling the long-term fiscal and competitive challenges facing our developed economies. The result is profound uncertainty about the road ahead, a lack of trust in political institutions, and paralysis in markets.


This urge to sit on the sidelines until better times return is not only inhibiting economic growth, it is exacerbating the silent crisis of inadequate retirement savings. That crisis is already a reality for older workers, the value of whose nest eggs has plunged with the value of their homes. Many of these older workers must now find other sources of income over the longer term.

Unless we are able to educate younger workers to begin saving for retirement now, allowing their returns to compound over many decades, the retirement-savings gaps that society faces will only widen. For example, someone entering the workforce today at age 22 who saves $4,000 a year can accumulate $1 million by age 62, assuming an annualized return of 8%. If that same worker waits until age 32 to start investing for retirement, he will have to save more than twice as much each year to reach the same goal at the same rate of return.

Restoring investor confidence begins by recognizing that for all the challenges that remain, there are signs of life in financial markets. Investors with a long-term perspective have benefited from the rally in U.S. equities over the past two years. There is also cause for cautious optimism about the outlook for the global economy, including actions to prevent the breakup of the euro; continued, if slower, growth in China; and the beginnings of a U.S. housing recovery.

Make no mistake—markets will remain volatile. The unprecedented impact of political risk on the markets all but guarantees it. This volatility also creates opportunities to invest at attractive prices.

U.S. equities today are historically cheap, at a price-to-earnings ratio of around 15, down from a 20-year average of close to 20.

Continued progress, however, requires action from both the financial sector and government to restore the trust and certainty missing today. . . .

In my business, we explain to investors that they cannot save for the future in the future. It's too late by then. The instinct to preserve what we have today is a powerful, human one—but it will not build what we need for tomorrow."

Summing Up

To repeat, we should get in the habit of saving and investing as soon as we begin working. Then we need to keep it up until our retirement decades later.

That's the best, if not the only, way to assure ourselves of a stable and secure financial retirement package.

And for those younger folks out there, take it from an old codger like me. Time flies.

So please take the time right now to learn, internalize and then heed the rule of 72. That simply means getting an early understanding that starting to invest 10 years earlier than otherwise, and then over time earning 8% compounded annually on that money invested, will result in TWICE AS MANY "magical" funds at the end of the rainbow.

Simply stated, 10 years more at the front end will make a world of difference at the back end. Just like "magic."

And the rule of 72 (years invested times average annual rate of investment return equals 72 and represents the time it takes for $1 to become $2) is just simple math.

But it's powerful math. 

Thanks. Bob.

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