Perspective :

Little Changes for Big Plans

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Soundtrack for this issue: "The Waiting (is the Hardest Part)” by Tom Petty

Tom Petty may be talking about love in these lyrics, but the message is applicable in so many aspects of life. Making decisions today in preparation for the future and hoping they work out as planned is something many of us do every day. Managing your retirement account is a similar situation. We put money away today and wait in hopes it will grow and be enough to fund our future endeavors. It can seem like a daunting task and maybe even a little bit scary. The money may feel scarce and as if it is better used today. Investing for retirement can be difficult so it’s important to keep in mind that a big part of it could be taking it on faith and waiting for it to grow.

Two principles I strongly encourage are to invest early and invest more when you can. Bumping up retirement contributions by just $50 a month can have an exponential impact. In the broad scheme of monthly expenses, this is equivalent to a couple eating out once a month.

The chart above illustrates the impact of adding additional money to a 401(k). Let’s call this person Joe, for ease of explanation. Joe is 30 years old and wants to retire at 65.  For this example, we are using a hypothetical 7% annualized return before advisory and other custodial fees.

As you can see from the chart, every little increase helps grow Joe’s retirement assets. If he contributes an additional $500 a month, his ending 401(k) balance could be $855,707 higher. Let’s assume Joe makes $50,000 a year so increasing his contribution by $500 is equal to 12% of his pre-tax income. While that may seem like an unreachable amount, keep in mind many of us have house or car payments greater than $500 a month. Why not cut costs from other places and prioritize our retirement? Think of it as an investment that is as important as a house or car? Set a goal to work toward contributing more and more to your retirement with an end goal of 15% or the maximum allowable in mind. Also, consider the company match so if your company will match 4%, then you need to contribute 11% to get to that 15% mark.

Here are some tips to keep you focused:

  1. Review your 401(k)
    Understand how much you are adding to your 401(k). What could your ending balance be if you continue doing what you are doing?
  2. Try for more

Start with $25 increments. Identify expenses to trim to increase your 401(k) contributions because it pays off in the long run. After you get used to the first increase, repeat and find more areas to cut and contribute more.

  1. Please, Please, max your employer match!!!
    If you do nothing else, at least invest enough to receive the match from your employer. Often, the match is around 3% which may feel like a lot, but every little bit gets you closer to your goal. Plus, if you invest 3% and your employer invests 3%, your contribution is now 6% so it’s like getting a 3% raise.

Planning for retirement comes down to making decisions today that will have lasting impacts. It’s easy to find reasons not to invest, however, it’s important to be proactive and invest today. Take it on faith, take it to the heart, and very importantly, wait (be patient). Make sure you are familiar with the impact of your current decisions on your 401(k). Remember to try and invest more where you can. Just a little improvement can have a lasting impact.

If you need assistance with planning your retirement, I’m more than happy to review the information with you.

Past performance is no guarantee of future returns. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Exclusive reliance on the information herein is not advised. Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice.
Advisory and custodial fees have an impact on performance. Please ask you financial advisor what affect those fees will have on your individual portfolio return. Before investing consider the investment objectives, fees and expenses.

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