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Orientation (section 1)
The best saving and investment habits
pay off throughout
life. Our measured approach creates a reasonable expectation. And, assists individuals in charting their course to financial
success.
In general, the longer your planning horizon the
more opportunity we have to enhance investment returns through the effects of compound interest, tax-deferred growth,
and possibly higher risk tolerances. Let's explore some basic planning considerations relevant to different life stages.
Starting Out…
From ages 25 to 35, common financial goals often include: saving for a down payment on a
first home, establishing a college fund for young children and putting away funds for retirement. But common financial goals
often create competition from perhaps limited income resources. Therefore, it is imperative that you spend the time necessary
to rank your financial goals in order of importance.
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When planning for retirement, individuals at this stage
would do well to start saving as early as possible. They should consider contributing the maximum to an employer-sponsored
plan, such as a 401(k) plan. Many companies match all or a portion of employee contributions, which will further enhance long-term
results. Individuals not participating in employer-sponsored plans should consider taking advantage of Individual Retirement
Accounts (IRAs). In either case, contributions and earnings are taxed only when withdrawn. This deferred tax benefit will
allow individuals to retain more of their discretionary income.
It is important to follow a diversified investment
strategy which conforms to your long-range planning goals. A well-diversified portfolio uses different types of investments
and investment classes to cover a wide range of the risk-return spectrum. Examples of some investment vehicles include stocks,
bonds, mutual funds, certificates of deposit (CDs), savings, and money market accounts. Through diversification, risk
is spread over a broader range of investments, potentially minimizing the impact of downturns in the economy or particular
market sectors. However, diversification does not assure a profit or protect against loss in a declining market.
The Peak Earning Years…
During the period from
ages 35 to 55, saving for a child’s college education often becomes a higher priority. As earnings increase, many individuals
may want to "trade up" to a larger home or make another major purchase, such as a vacation home. Moreover, as the
years pass, the need to boost retirement savings becomes a more pressing reality.
The key to a solid investment
approach may be to continue to take advantage of the potential growth produced by an equity-dominated portfolio. Ultimately,
it may be wise to gradually begin introducing income investments. Bond or stock and bond funds may help produce valuable income
that can be used to help pay for a child’s college expenses or to help diversify a portfolio.
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Nearing
Retirement…
Between the ages of 55 to 65,
the emphasis is generally on safeguarding accumulated assets. Another goal is to reduce overall debt, such as from college
expenses or a mortgage and to take advantage of extra discretionary income to help increase retirement savings. As the planning horizon shortens, the watchwords are "asset preservation."
A typical portfolio strategy involves shifting a larger portion of assets from equities to more conservative fixed-income
securities to achieve a better balance between growth and income. Income mutual funds, bond funds, and annuities can all play
important roles in balancing a portfolio. Retirement Years…
After age 65, the primary financial focus is generally on generating
a steady income stream and protecting it from the ravages of inflation and taxes. As salary or wages decrease or stop, investments
must produce sufficient income to help supplement Social Security and pension benefits. As an investment strategy, a retiree’s portfolio should place a greater emphasis on income-generating
stock and bond funds and annuities. However, growth stocks and mutual funds should not be entirely discounted. Growth-type
investments can still serve a useful purpose in the battle against inflation. When Planning…
Always remember that investing involves
risk. There are never guarantees. And, while past performance is informative, you should never assume that historical returns
will mean similar gains in the future. Therefore, it is the actual knowledge of how investments work and what potential benefits
they can provide that help determine your ability to accept risk and feel confident in your decisions.
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