It’s funny how things change. When we each started in this business back in 1993, people were beating down our doors to get into the stock market. Didn’t they know it had only been about five years since the horrific market collapse on Black Monday in October of 1987? No matter; it seemed everybody wanted to invest.
Fast forward 20 years, and clearly, things have changed. While it’s been over four-and-a-half years since the market bottomed out at the beginning of 2009, this time people are still sitting on the sidelines – seemingly petrified by the notion of dipping a toe back into the markets.
So here’s the thing: We get it. By no stretch of the imagination did either of us enjoy the losses we took in our own portfolios back in 2008 or before that in 2000. And sitting down and talking with clients who were experiencing the same thing was — let’s just say — a miserable experience.
We’re in the financial business and spend our days immersed in money matters and the markets. So losing our hard-earned money, or seeing you lose yours, is irritating – to say the least! But still, we invest for our longer term goals and encourage you to consider doing the same. Why? Because even though we can lose money by investing, we know we’ve got no real chance of accumulating the kind of money we’ll need to retire if we don’t do it. In other words, we’ve each decided that for us investing is not an option; it’s a necessity. And that may be the case for you, too. Not convinced? Read on.
To illustrate our point of how important it is to invest, let’s look at what it would take to accumulate the iconic figure of $1 million over 30 years through your own efforts. Nope, you get no assistance from the lottery or a rich old relative.
Different Roads to a Million
If you think you’re going to get to $1 million simply by stashing money in a savings account, think again. For most of us, reaching that goal will take some good old-fashioned systematic and automatic investing. Notice, we didn’t use the word, “saving.” Why? Because taking the seemingly safe route and using your savings account as the engine to get you to the million-dollar mark, would take a HUGE effort — quite frankly, you’d likely not even get close. If we’re charitable and assume that your savings account earns 1%, the good news is that, technically, you could make it to a million. The bad news is that you’re going to have to put away $2,381 per month to get there. To be clear, that’s $2,381 a month, every month, for 30 years. So be honest, how likely is that?
On the other hand, if you were to invest in a diversified portfolio instead and earn 8% (which we know is not guaranteed and is purely hypothetical), it would only take $667 per month. While this is still no small amount of money, it’s much less than if you relied solely on a savings account.
We realize we’ve simplified things a bit in this example to illustrate the point. The fact is, we hope that over the years you’ll use every promotion or pay raise to increase what you’re investing. You’ll probably start out small and gradually increase the amount you’re putting away. But either way, getting where you want to go could be a fairly daunting task in saver’s mode. Speaking, of getting where you want to go…
A Million Dollars Isn’t What It Once Was
Tinker around with the Bureau of Labor Statistics inflation calculator and you’ll find that having a million dollars back when began our financial planning careers would have bought you a lot more than it will today. That’s because inflation has made things more expensive. In fact, when you consider inflation, a million dollars 20 years ago would only buy you about $617,000 of equivalent goods and services today. That’s a serious erosion of purchasing power! If you don’t account for inflation going forward, you’re probably going to fall woefully short of your goals – even if you do invest.
Finally, it’s important to realize that even though we used a million dollars as our goal for this illustration, that’s not likely the number you should use when figuring out how much you should be putting away. We all have different visions of our future. Some might need more; some less.
Regardless of your goal though, it’s unlikely you’ll be able to save enough to make it happen if all you earn on your money are the “safe” rates of return available outside of the investment markets. Does investing guarantee success? Of course not. But for most people – us included – it’s the only approach that offers a shot at ever being able to quit working some day.
As always, we encourage our members to speak with one of our financial advisors who can help determine which investment vehicles are best suited for you based upon your individual goals, objectives, risk tolerance, and time horizon.
- Examples given are hypothetical illustrations and not necessarily an indication of the benefits or features of any USAA product.
- Investing in securities products involves risk, including possible loss of principal.
- Past performance is no guarantee of future results.
- Diversification does not guarantee a profit or prevent a loss.
- Asset allocation does not protect against a loss or guarantee that an investor's goal will be met. Systematic investment plans do not assure a profit or protect against a loss in declining markets.
- Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.
- DID: 150696-1213
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