The main goal of modern working class professionals is the accumulation of highest value of investments by the age of retirement. For its achievement, it is vital to save on money as early as possible.
Below mentioned instance would explain the above-mentioned point.
Take the case of two investors, investor A and investor B. Investor A deposits $ 12,000 each year for a period of 10 years beginning from the age of 35 without adding anything more. The total contribution by investor A comes to around $ 1, 20,000. The second investor, investor B waits until the age of 45 and then, invests an amount of $ 12,000 each year for the next 20 years. The total contribution by investor B comes to around $ 2, 40,000. Both earn an interest of 7 % sheltered, compounded from taxes in the Registered Retirement Savings Plan.
By the time both reach the age of 65, while the investments of investor A would come to around $ 686,494, the investments of investor B would come to around $526,382. The reason for the investor A doing much better than investor B is the fact that, investor A began earlier. Over time, the compounding of interest is extremely powerful.
To use a sound investment strategy is the next most important role in the achievement of higher retirement savings. However, sound strategy is not necessarily the safest strategy. Rather, the sound strategy is the one that involves going much further by taking a moderate form of risk with the boosting of average annual returns over a period.
For instance, consider an investor starting his investments with $ 1, 00,000. After three decades, the value of portfolio compounded at the rate of 5 % may come to around $ 444,671. If, however, the portfolio compounds at the rate of 8 %, the value would come to around $ 1,052,470. This is the main difference and can mean a lot to the comfort level of a retired person and the enjoyment of rest of his life. This illustrates the reason as to why it is necessary to work hard, in order to produce the extra 2 % or 3 % of the mean yearly returns.
The safest form of investment is to hold short-term government bonds and government treasury bills. Presently, this provides a return of not more than 5 % each year.
Investments for Funding Retirement:
For most people drawing on their savings for funding current retirement, very often, the safest route makes the most sense. This would mean investments in bonds and T-bills are certain not to lose the value. Nevertheless, like all issues related to investments, even this safest approach has certain other drawbacks.
For those retired people who have invested in stocks through the mutual funds, a systematic withdrawal plan works well as an option to owning of bonds.
However, for investors who have already invested in bonds, although the amount earned in interest from bonds is sufficient for the present expenses, it may not suffice in 10 to 15 years when the expenses are higher. This is a sound strategy for those people, who are retired and facing two decades or more years of life expectancy.