This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, March 8, 2010

Dollars & Cents: Impetus for Investing

Many people, especially young people, don’t often give serious consideration to saving or investing for retirement. All too often they expect their financial future to be taken care of by either their employers (if they have a career) or the government. Unfortunately, as the last few years have made quite apparent, these assumptions can be very dangerous.

First regarding employers, let’s face facts: Since 2008 the job market is shaky at best. Jobs can disappear at any time, as can 401(k) matching programs (this happened in many companies during 2008 and 2009), as employers continue to look for ways to cut costs.

Many companies want to help their employees save for retirement, but they do expect their employees to have additional savings aside from employer-sponsored plans.

When it comes to relying on the government to secure a person’s financial future, the idea is almost laughable. Put bluntly, our generation will be lucky to ever see a thin dime back from Social Security.

As books, TV personalities and many political activists have shown in detail, our government has shown itself totally incompetent of handling finances, be it fiscal deficits or funding government programs.

What this means to young investors: We need to be prepared to fend for ourselves. We need to write off Social Security as a lost cause and look at 401(k) programs for what they are: a small piece of the pie.

Some readers would undoubtedly argue that their parents take care of their finances, and they will make sure everything is structured properly. Young investors can rest assured that, after 2008, their parents are in hot water themselves, and are probably worried enough about their own retirement, which was just pushed out four or more years, that they don’t have time to worry about their kids.

Young readers need to understand that your parents raised you, fed you, clothed you, maybe even put you through college. You’re on your own now, and need to take care of yourself. If anything, you need to be preparing yourself to take care of your parents, should they ever need your support.

Unfortunately, the statistics tell a very different story. In fact, the savings rate in the United States is among the lowest of all industrialized nations.

Here’s a sad fact: More low-income families think that they are more likely to accumulate money for retirement by winning the lottery than by saving and investing over time.

Something that few investors understand is the power of compound interest. For a startling example, let’s assume that young investors decided to put themselves on a strict saving plan for the next 50 years, so they could accumulate enough money to retire.

These young investors would probably just be starting their career, but they think they can watch their spending enough that they can consistently put away $100 every month for the next 50 years. They plan to invest the money they save with a good financial adviser who can average returns of 10 percent per year [after fees] on their hard-earned money.

Now, a quick calculator reference will reveal that over the course of this 50-year program, this investor has saved away $60,000, certainly not enough to live on through retirement. However, taking into account the interest they’ve been earning year after year, by the time they retire, their account will be worth well over a million dollars, or $1,331,511 to be precise.

Saving and investing are surprisingly small tasks for those who can start early. They require a well-thought plan and plenty of discipline. Our future is not something we can leave in the hands of our employers or politicians; it’s up to us to take charge and play an active role.

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