Advice iq contributions vs. growth


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Which is better? Contributions or Growth?

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Advice iq contributions vs. growth

  1. 1. Contributions vs. Growth Submitted by Larry Frank Sr. on Wed, 08/14/2013 - 9:00am The two ways to grow your portfolio are through contributing your own savings and market returns. In the latter stages of life, your own contributions have a much larger impact on your overall savings. Obviously, saving $6,000 every year is better than saving just $6,000 once. But the contributions that you make earliest in life matter the most. The longer these funds stay in the market, the more you benefit from the magic of compounding returns. Dr. Craig Israelsen crunched some numbers for a Financial Planning magazine article titled “Best Way to Bulk Up.” He found that for those younger than age 45, increasing returns has a greater impact than increasing savings. He cautions, though, that this does not mean the young can reach their goals by under-saving. No, they should save as much as they can as early as they can, and avoid the attitude that today’s wants are more important than later needs. Israelsen found that if you start saving 6% of a $35,000 salary at age 25, you have a portfolio worth $1.39 million by age 65 if you get an average 10% return from the markets. If instead you save 10% of your salary and the market only returns 6%, you reach age 65 with $880,012 in your portfolio. If you play the long game, returns matter more. For those older than 45, increasing contributions provides a greater impact. Starting at age 45, saving 6% with 10% returns brings you $300,173 by 65. With 6% returns and a 10% savings rate, you reach that milestone age with $324,344. What favors the young is that they have time to reach for more risk. With the long time horizon of a 20-something, your savings have enough years to recover from a debilitating market crash. Also, the effect of compounding interest doesn’t kick in until the later years – years only the young have. The cost of delay essentially means that compounding is
  2. 2. limited. Older folks who start saving late don’t have those later years of compounding because they begin taking money out before interest can really work for them. Even though it sounds simple for those under 45 to take on more risk and reach for more return, remember that returns are not under anyone’s control. Over the very long term, stocks tend to rise faster than inflation, but you can just as easily strike out over the course of many years. Since the dot-com crash of 2000, the inflation-adjusted returns from stocks is almost nil before taxes and fees. It still beats holding cash under your mattress, however. It’s fitting that contributions are more effective later in the game since the Internal Revenue Service allows those over 50 to make an extra $5,500 in “catch-up” contributions to 401(k)s and other retirement accounts. At any age, contributions are always under everyone’s control, so proactively maximize them. No matter how old you are, save as much as you can toward retirement. You are sure to thank yourself in the future for making the sacrifice. Follow AdviceIQ on Twitter at @adviceiq. Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning. AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients whose income is between $250,000 and $500,000 with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily. Topic: Investing Stocks Retirement Planning