3 Reasons to Invest Now

During my first professional job at San Diego State University, I went to a meeting sponsored by the human resources department explaining the 403(b) retirement plan. It’s like a 401(k), except designed for educational institutions. The speaker explained that I could have a percent of my salary transferred into a retirement account and that I wouldn’t pay income tax on any money I diverted into the account.

I figured that it could save me $240 for every $1,000 I invested at my 24% tax rate.

Even better, there would be no tax on the money, the dividends or capital gains, as long as the money remained in the retirement account.

This was unbelievable!

And if that wasn’t enough of a draw, the speaker said that my employer would match my contribution up to 5% of my salary and I could invest that money as well. The beauty of this was that the money was mine to keep.

I thought I was dreaming!

The human resources representative explained that the law allowed a maximum savings of $15,500 per year in this account (in 2020 the maximum contribution amount is $19,500 per year) and it could grow and compound for years, without paying any taxes until the money was withdrawn in retirement.

I walked out of the meeting with my head swimming. There were charts and graphs of the potential wealth I could accrue over the years and the idea that a small – okay not really that small – sacrifice today could lead to spectacular wealth for my retirement.

This article will explain three reasons why you should consider investing now, and how small financial behaviors today can lead to extraordinary wealth for your later years. And the beauty is that you don’t need to earn a tremendous amount of money to start investing now.

1. You should consider investing now to enjoy compound returns.

Albert Einstein is quoted as saying that “Compound interest is the eighth wonder of the world. He who understands it, earns it and he who doesn’t pays it.”

Once you understand how compound returns can grow your investment dollars, it’s easier to choose saving and investing today, overspending.

The concept of compounding works like this:

Invest $5,000 in year one and earn 7% return and at year end, your account is worth $5,350.

In year two, your $5,350 investment grows to $5,724.50.

In year three, the $5,724.50 investment grows to $6,125.22

In year four the $6,125.22 investment grows to $6,554.00

By the end of year five your original $5,000 is worth $7,012.76

This example assumes that your investments earn 7% each year.

This is the beauty of compounding. Your money is making more money and each additional amount is added to the original balance and continues to grow.

Now, imagine that you begin saving in your workplace 401(k) retirement account or 403(b) at age 30 and your employer matches your contribution with free money. As your income grows, you decide to increase your contributions. The compounding of your investments is mind boggling.

This retirement account calculator shows that by contributing just 10% of your income each year, with a 5% employer match, at age 65 you’ll amass $1,529,583.

The analysis assumes:

  • Your current salary is $60,000
  • You contribute and invest 10% of your income
  • Your salary increases 3% per year
  • Your employer adds 5% of your salary annually
  • Your average annual rate of return is 7%
  • You invest for 35 years

Source: https://www.bankrate.com/calculators/retirement/401-k-retirement-calculator.aspx

2. You should consider investing now, because you need to invest less money to enjoy a greater payoff.

Imagine two investors start investing at different times. One invests less than the other and ends up with more money in retirement.

That’s the second reason to start investing now. If you start investing earlier it’s easier to amass more money through compounding.

Cathleen, age 30, has a great job and is motivated to invest for retirement immediately. She earns $85,000 per year and decides to invest $19,000 per year in her 401(k) account, the maximum amount the law allows. Cathleen’s employer also contributes 5% of Cathleen’s salary or $4,250 per year. This amounts to $23,250 invested every year. She earns an average 7% annually and invests in a 70% stock and 30% bond allocation.

At age 40, Cathleen’s retirement account is worth $337,308. Not bad for 10 years investing!

She stops investing at age 40 and leaves the balance in the account as it continues to grow at 7% annually. She doesn’t add any additional money to the account after age 40.

Cathleen invested a total of $232,500 for retirement, including her employer’s contributions.

When Cathleen turns 65 years old, the $232,500 that was invested is worth $1,830,700, without adding any additional funds after age 40.

Kris wasn’t as savvy as Cathleen. He didn’t begin investing in his 401(k) until age 40.

At age 40 Kris invests the exact same amount per year as Kathleen did and his employer also invests the identical amount for a total of $23,250 per year. His investments also average a 7% annual return.

Kris continued to invest the exact same amount for the next 25 years, 15 years longer than Cathleen, for a total investment amount of $581,250, including the employer contributions.

At age 65, Kris’ account is worth $1,578,700. Now, this is a great amount of money, but, let’s compare Kris’ total investment with that of Cathleen.

Cathleen and her employer invested $232,500 and ended up with $1,830,700 at retirement.

Kris and his employer invest $581,250, more than double the amount that Kathleen invests, and ended up with $1,578,700, roughly a quarter of a million dollars less than Kathleen.

And that’s the second reason to start investing now.

By starting to invest earlier, you can amass greater wealth with a smaller investment amount.

Assumptions: Cathleen and her employer invested $23,250 per year from age 30 to age 40. Kris and his employer invested $23,250 per year from age 40 to age 65. Each earned an average annual return of 7%. No adjustments were made for taxes or inflation.

3. You should start investing now so that you have a better chance of reaching your financial goals.

Investing isn’t only to amass money for retirement, although that’s an important goal. Investing is one of the best ways to build up cash for any goal that is intermediate-term or occurs in seven years or more. These intermediate term goals might include, funding a child’s education, buying a home, taking a special vacation, or buying a car with cash.

If you keep your money in a bank account or certificate of deposit, you’ll earn low single digit returns. While, the investment markets have averaged much greater returns over long periods of time. With greater returns over time, you’ll be more likely to reach your financial goals.

The reason investing is ideal for intermediate or longer term goals is because in the short term, the financial markets are volatile. While, over the long term, they have been shown to grow your wealth more rapidly than a savings account.

The smartest investors understand, that since money in your retirement account needs to stay put until you’re at least 59 ½, or you’ll pay a penalty for withdrawals, it’s a good idea to invest in a taxable account, too. This might be an investment account at a major broker like Fidelity, Schwab or eTrade. Or you might choose to invest with an app like Robinhood or M1 Finance.

In fact, some intermediate term goals, that you might have thought were out of reach, could be achievable by starting to invest now.

3 Reasons to Invest Now – Wrap up

The simplest reason to invest now is because your money grows exponentially, the longer it compounds. So the earlier you begin investing, the easier it is  to amass a large retirement stash or money for mid-term goals.

Whether you start investing with $100 per month or $1,000, the most important reason to invest now is to develop the saving and investing habit. It’ll make your future richer and your financial worries fewer.

Disclaimer; The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.

 

 

 

 

About the Author:

 

Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is author of Personal Finance; An Encyclopedia of Modern Money Management and several other books. Friedberg’s websites include Robo-Advisor Pros.com and Barbara Friedberg Personal Finance.com.

 

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Blooom’s Year-End Financial Planning Checklist (Updated For 2019)

The end of the year is a great time to reflect on your financial goals, the progress you’ve made, and plan ahead for the upcoming year. Read our financial planning checklist below for things you may want to consider:

1. Update wills/trusts and beneficiaries.

Get married this year? Have kids? Get divorced? Big life events mean it’s time to make sure legal docs like your will or trust, powers of attorney, life insurance policies, and account beneficiaries are all up-to-date. Forgetting to make these updates can be disastrous for families at some of the worst possible moments in their lives. Get in the habit of reviewing these things annually so nothing is missed.

2. Get a handle on your debt and plan ahead for the next holiday shopping season.

Lay it all out there to get ready to tackle debt in the new year. If you’re like most Americans, you probably racked up some credit card debt you aren’t proud of this holiday season. What can you learn from that going into next year? Figure out how much of a holiday spending budget you need to plan for, divide that by 10 or 11 months and automate your savings into a savings account dedicated to holiday spending.

3. Use any potential raise you may receive (and possibly your bonus) to increase your 401k contributions.

Starting this year, get into the habit of taking a portion of any raise you receive and dedicating it to your 401k. For example, if you get a 5% raise, consider bumping up your contributions by 1% or more. Your paycheck still goes up, but your 401k also gets a boost. This habit can help you work toward maximizing your contributions over time while having no real impact on your cash flow or budget. Also, see if your employer will allow you to contribute all or part of any year-end bonus you may receive, toward your 401k. This can help reduce your taxable income come tax season and it also means you avoid the extra tax withholding on bonuses for that money.

4. If your employer’s health plan is changing in the coming year, evaluate the potential range of costs for each option, before choosing.

Health-related costs are often hard to plan for, but can cause serious unexpected damage to any financial plan that doesn’t adequately account for them. To get an idea of what your total health care costs might be under any specific plan in the coming year, take the monthly insurance premium and multiply it by 12. This will give you your minimum cost of healthcare for the coming year. Next, look up your insurance plan’s out-of-pocket maximum.

This can help indicate the most you can expect to pay, should you or someone in your family face a serious medical expense, or several, in the coming year. Once you understand the potential costs you could face and select the plan you’re most comfortable with, it’s important to then revisit things like HSA (Health Savings Account) contributions (if you have a high-deductible plan) and exactly how much you may want to maintain in the cash portion of your account for easy access, before investing.

5. Don’t forget about RMDs (for those over 70.5)

Required minimum distributions (RMDs) can be a nightmare tax situation for those over age 70, if not planned for and handled appropriately. The key thing to be aware of is that once most individuals reach 70.5 yrs old, there is a specific minimum amount the IRS will require them to withdraw from most retirement accounts, including 401ks and IRAs. Failing to withdraw the required minimum by Dec 31st of each year, may lead to a 50% tax penalty on the amount, which is one of the harshest tax penalties around.

Not even close to 70.5 yrs old just yet? Consider passing this reminder on to any family members that are. They’ll likely thank you later.

6. Set aside time for a year-end financial review

Look back on the year and take note of what you were able to accomplish financially and what setbacks you may have had. Use this past year as an opportunity to continue making smart financial decisions in the new year and learn from any of the times you may have stumbled. If you have a family, talk about upcoming trips, savings goals, and any other things you need to focus on next year. Set goals and even plan to celebrate financial accomplishments as a family throughout the year. Make money fun and before you know it, you’ll feel the freedom that comes along with financial security and eventually, financial independence!

Automate your long-term investments, like your 401k management!

Blooom is here to make your life easier in the coming year. Now that you’ve read our financial planning checklist for 2019, link your account with us today for a free analysis to see just how much you could save in hidden fees with a managed 401k via Blooom. Contact us today for further questions!

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I am Thankful for Staying the Course!

As the Thanksgiving holiday is upon us and we prepare for the awkward discussions around the dinner table, we thought it was a good time to reflect upon what we should be thankful for regarding our retirement savings. At a minimum, maybe we can provide you with some fodder to redirect the awkward political discussions into something more positive and productive.

But before we can talk about what we are thankful for, it is important to reflect back on the condition of the stock market just 12 short months ago. As a reminder, from early October 2018 through late December 2018 the stock market (S&P 500) declined by 19.9%! Technically, a Bear Market is defined by a decline in the stock market of 20% or more. I’m sorry, but this was close enough in my book! Let’s be honest, it was a brutal 50 day period and, true to form, the media helped to exacerbate the panic with headlines like this:

“Stock markets on track for the worst December since the Great Depression”

“The Stock market just booked its ugliest Christmas Eve plunge – ever”

“US stocks log worst year since 2008”

Candidly, it is entirely possible that you have put that whole 4th quarter 2018, and all its trappings, out of your mind but the point of this article is to highlight what you can be thankful for. Clearly, by NOT reacting to the fear and panic of late 2018 – you are (hopefully) wealthier today than you were just 12 months ago – at least as far as your blooom managed retirement account is concerned. 

Since Christmas Eve 2018, the stock market is up nearly 25%. Or in other words, Santa Claus delivered quite a gift to all those investors that had the fortitude to tune out the noise of late last year, focus on their long-term goals, and stay the course. As you may know by now, this is a pretty consistent message we think is essential for our clients to hear. As many of you probably remember, here was our take then.

It’s all too easy to make bad investment decisions in times of stress that, in the moment, often seem like the next big crash or financial crisis. But it’s important to also look back and be thankful for the good decisions we make as investors, like tuning out the noise and staying focused on the long-term. These last 12 months have given us great perspective and reinforced solid investing lessons we all can be thankful for.

I’ll leave you with this – Remember that there will certainly be times in the future similar to what we experienced in late 2018. And once again, as history has always shown, staying the course and not panicking out of your portfolio is, and will continue to be, the right thing to do. 

From all of us here at Blooom, Happy Thanksgiving!

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What is a Bond?

What is a Bond, and How Does it Work?

Bonds are a type of debt issued by a company or government to raise money from investors. You’ve likely heard the word before in the context of pretty much any investing related conversation, along with stocks. So what is it that makes bonds different from stocks? And why would someone want bonds in their retirement account, or any investment account?

The basics about bonds

The easiest way to think about a bond is to think of a loan. When you take out a loan from a bank for instance, you are borrowing money from the bank. In exchange for receiving that money from the bank, you are going to have to pay it back with interest added. To the bank, this loan is an investment they intend to get back from you, with interest being the added bonus for the risk they took, along with the amount of time the money was out of their hands and in yours.

When a company or a government needs/wants to raise money, one option it has is to borrow that money. A bond is just a way for companies or governments to borrow money from investors. With a bond, the investor becomes the bank – receiving interest payments at a rate determined by the creditworthiness of the company or government and the amount of time before the money is paid back.

Generally, the better a company or government’s financial situation, the lower the interest rate an investor will demand to purchase a bond issued by them, and vice versa. Likewise, the longer an issuer is wanting to hold onto the money before giving the investor back their principal investment, the higher the interest rate will need to be, in most cases.

Since bonds are essentially just a type of debt obligation that pays investors a steady stream of income over time, in addition to their original principal investment (at maturity), bonds are typically considered much less risky investments than stocks. 

However, with lower risk comes lower expected returns, especially over long periods. Historically, stocks have outperformed bonds over every single rolling 20-year period. But, returns are not the primary or even secondary purpose of holding bonds in a diversified portfolio.  

Why would an investor want to include bonds in their portfolio?

Because of their lower-risk properties, bonds can help provide a buffer against volatility of other asset classes like stocks, in a diversified portfolio. As mentioned, bonds also provide a stream of steady interest payments to the investor, which can be very important to an investor that is either retired, or living off the income from their bonds for any other reason. Generally, as an investor gets closer to retirement over their career, they can benefit from increasing the amount of bonds in their portfolio. Doing so helps to preserve more of the wealth they’ve worked hard over the years to build. 

By shifting more and more money from higher-risk investments like stocks, to lower risk investments like bonds, an investor’s portfolio becomes less volatile. This is important for someone nearing or already in retirement, when they are either not contributing to their portfolio anymore and therefore unable to benefit from stock market volatility, OR they are on track to meet their goals and no longer need to take the added risk of investing heavily in stocks in order to achieve long-term growth. 

Investors that can benefit from holding bonds in their retirement portfolio:

  1. Someone that finds it difficult to stomach the short-term ups and downs of the stock market.
  2. Someone with less than 25 years until retirement (greater percentage of bonds over time as retirement approaches).
  3. Someone on track to meet or exceed their retirement savings goal with a lower risk portfolio.
  4. Someone that is already retired and/or needing bonds as a source of fixed income.

A simplified example of how bonds work

How does a bond work? Let’s say you have $10,000 to invest right now and are looking for something that will be low risk and provide a steady stream of income for the next 10 years. In other words, you’re looking for a 10-year bond!

You find out that a large company that’s been around for more than a century with a solid financial history is issuing new 10 year bonds at a 4% interest rate. This means that you will agree to give the company $10,000 today in exchange for payments of $400 per year for the next ten years. In ten years, the bond will “mature” and you will be given back your $10,000 initial investment. 

Bond investing gets tricky and complicated when someone holding an individual bond needs or wants to sell the bond before maturity. For example, let’s say you decided to buy the above bond, but need to sell it just one year later. You need to find another investor to buy it from you. If the same company is now issuing new bonds at an interest rate of 6%, why would another investor give you the same $10,000 for a bond paying only 4%? They wouldn’t. They would only be willing to buy the bond from you at a discount from the original “face value” of the bond. 

This is known as interest rate risk and it can get very complicated. The basic thing you need to know is that as market interest rates increase, the price an investor is willing to pay to purchase an existing bond decreases, and vice versa. Luckily, it’s not as relevant to investors holding bonds in a retirement account…

How does this apply to my retirement account?

Retirement accounts like 401(k)s offer a menu of investment options for employees (participants) to choose from. These investment options are most often known as mutual funds. A mutual fund is a type of investment that owns hundreds or thousands of stocks and or bonds, and sometimes other things. Like a stock mutual fund, someone purchasing a single share of a bond mutual fund is effectively purchasing a diversified bond portfolio that owns a fractional piece of hundreds or thousands of individual corporate and/or government bonds. 

The benefits of broad bond diversification are similar to those of stock diversification. Mainly, holding many different individual bonds isolates the investor from the downside of any single bond issuer (company or government) defaulting on their bond.

Bond diversification also means that bonds in the mutual fund’s portfolio will likely be maturing on a regular basis, which gives the fund manager the ability to always be purchasing new bonds at current interest rates. This practice of reinvesting in newly issued bonds helps mitigate the  interest rate risk mentioned above.

Why bonds can be an important piece of your portfolio

Risk is one very important factor that we actually CAN control, to some extent, as investors. Bonds won’t eliminate all risk, but can reduce overall risk in your portfolio. That said, there are many different types of bonds and some can be considered riskier than some stocks at times. In general though, bonds tend to give investors a way to reduce overall risk to their portfolio, while still being able to invest in riskier assets like stocks. While bonds will likely reduce your portfolio returns when the stock market is doing well, they will also act as downside protection when stocks decline, as they do fairly often. 

While a portfolio containing bonds will likely underperform one comprised entirely stocks over the long-term, the returns will likely be more steady and consistent, the more bond exposure you have. This can be very important to an investor’s ability to stick to their long-term strategy through thick and thin. Ultimately, the amount of bonds anyone should hold in their portfolio depends on their age, time until retirement, and comfort with risk, also known as risk tolerance.

Make the switch to Blooom

Now that you know what a bond is and how it works, allow our team of experts to help guide the way to an optimized portfolio with Blooom. Sign up today to improve the allocation of your account and get ahead of the financial curve. Have more questions? We’ve got you covered! Contact us today and get the answers you deserve for a better financial future!

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.

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What is a Stock?

What is Stock?

In short, stock is ownership of a company. For any investor, the term stock should be a familiar one. You know you have them, or probably should have them to some extent, but what does owning a stock, or several (potentially thousands of) stocks actually mean?

The basics about Stocks

An easy way to think about stocks is to think of just about any business. When a business is started, it might be started by a single individual or several people. If several owners are involved, they each will own a share of the business, likely proportionate to the amount of money they contributed to get the business up and running. These shares are known as stock. And anyone owning stock in the company is called a shareholder or stockholder.

As the company grows, they may need to bring on additional investors in order to raise more money for things like expansion, production, new buildings, etc. Those new investors will want a share of the company as well, in exchange for their investment. So new shares are issued and ownership is divided between more individuals or entities.

Going Public, a.k.a. The IPO

When/if a company decides to go public, it issues new shares that become available to the public through a stock exchange, like the New York Stock Exchange, for example. At this point, virtually anyone with access to a brokerage account is able to invest in the company. Anyone that buys a share of stock in a company becomes a fractional owner of that company. Ownership of stock in a company means you now share in the earnings, or profits, of that company. 

Today’s earnings play a big role in the price of each share of a company’s stock. But a much bigger factor driving stock prices is the potential future earnings, or lack thereof, for a particular company. 

Things get complicated when you add human emotions and forecasting to the mix, but that is why stocks are a particularly volatile type of investment, specifically in the short-term. That said, the ability to share in the profits of successful businesses over long periods has historically been one of, if not THE most, effective ways to build wealth over time.

How does this apply to my retirement account?

Retirement accounts like 401(k)s offer a menu of investment options for employees (participants) to choose from. These investment options are most often known as mutual funds. A mutual fund is a type of investment that owns hundreds or thousands of stocks and or bonds, and sometimes other things. 

Because the mutual fund itself owns shares of many different companies, someone buying one share of a mutual fund is effectively able to own fractional shares of each company that mutual fund holds in its own portfolio. These investments, which are often an employee’s only option in a workplace retirement plan, provide broad diversification without the need to own whole shares of a bunch of individual companies. 

A brief example of how stocks work

Let’s say you have $100 to invest right now. If you want to buy some stocks, most brokerages will require you to purchase whole shares of each stock, meaning you have to buy at least one entire share of each. Oh, and there is often a commission for each trade. So if you want to buy one share of a company whose share price is $50, and the commission for that purchase costs $7, once you make the purchase, you only have $43 left to buy more stock(s). And remember, you only own one single share of one single stock so far…This means your ability to grow that $50 is completely dependent upon the success of that single company over time.

If you instead invest the whole $100 into a mutual fund in your retirement plan at work, that $100 will represent small fractional ownership of each of potentially thousands of individual companies held in the fund’s portfolio. While there are still fees associated with mutual funds, these fees are internal and will generally represent a significantly smaller percentage of your $100 investment than the commission charged, per individual stock transaction, by a brokerage. 

The failure or success of any single company the mutual fund owns is unlikely to make or break your account balance over time. In other words, you’re instantly diversified, reducing your risk of loss significantly, while giving you access to the potential long-term growth of each of those companies.

Why stocks can be great for long-term investors

While stocks can give investors a bumpy ride from time to time, they have averaged annual returns of about 10% over the last century, which is about twice what bonds have offered and 10 times more than a high yield savings account might offer today. There are years when stocks perform much better or worse than the average, but over time stocks held in a diversified portfolio have historically managed to reward investors willing to take the risk and stick to a long-term, disciplined investment strategy.

To be clear, there is a very important distinction to be made between holding individual stocks and holding stock mutual funds, index funds, or ETFs in a portfolio. Individual stock holdings carry significantly higher risk than more diversified options like stock funds. In fact, according to a study from 2018 in the Journal of Financial Economics – since 1926, 4 out of every 7 individual stocks have experienced lifetime buy-and-hold returns less than one-month treasuries, which are generally one of the lowest risk, lowest return investments around.

Have Confidence in Your Managed Portfolio with Blooom

At Blooom, we believe in a tried and tested approach to your 401k. Link your account with us today for a free analysis to see just how much you could save in hidden fees with a managed 401k with Blooom. Contact us today for further questions! 

Investing involves risk. Your investments are subject to loss of principal and are not guaranteed. Investors should consider their ability to continue investing through periods of fluctuating market conditions. Diversification doesn’t guarantee a profit and can still result in losses in declining markets. The information does not represent a recommendation to buy or sell securities.

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