16
Feb
2012

Objective: The article is to identify the “rules” for those who are investing for their retirement. It will be focused more on those that are going to retire (rather than those that are already in the retiring phase).

1.     Why is it important to set some parameters for retirement investing?

 It is important to understand the “rules” that govern investment growth. Understanding this allows us to focus on the most important factors that we can control for retirement investing.

Albert Einstein described that the most important parameters for successful investing: “The magic of compounding growth as the eighth wonder of the world.”

People benefit from knowing the parameters involved and which ones are most significant.

The value of an ongoing investment plan at any time in the future depends on the three key parameters of time, returns, and dollars contributed.

Naturally, increasing any of these parameters will increase the future value of your investment. But one parameter is much more important than the others.

Let’s illustrate with an example.

AMT (Dollar)

N (Time)

I (Return)

FV

2000

20

8%

98,845

2500 (+25%)

20

8%

123,557 (+25%)

2000

20

10% (+25%)

126,005 (+26%)

2000

25 (+25%)

8%

157,908 (+60%)

To summarize, a 25% increase in returns produces a negligibly higher 27% improvement, while a 25% increase in the time period increases your retirement fund by 60%. Clearly, time is the most important parameter in investment success.

Obviously, you can’t change history. In other words, if you are 20 years from retirement, you can’t start five years ago to turn it into 25. What we can control, however, is to not start five years from now.

If you are 20 years from your target, the best thing to do is to take advantage of all 20 of those years to let compounding work its magic. Human nature being what it is, we tend to procrastinate and ignore the issue and its financial impact, letting the potential 20-year period decrease to 18, 15, etc.

Pay yourself first

Retirement fund is our serious money. The only person can ensure to take good care of our retirement life is the one who are young today, i.e. is YOU, so always pay yourself first.

Too many people are thinking that the future will take care of itself.

If you want to live securely the last 20-to-40 years of your life, get time working for you, starting today. The highest cost of all is the cost of waiting.

THE COST OF WAITING

The Cost of Waiting

Note: The above assume a compound growth rate of 10%

Set up a monthly “pay yourself first” investment program now, and stick to it. An even better approach is to start a forced savings plan is possible.

 

How do these parameters differ from other investment objectives, for example, education investing?

No different. The 3 parameters for investing are same.

 Education fund: To pay for 3-4 years study & living cost

Retirement fund: To pay for 20-40 years of comfortable living cost & long term medical cost.

…Read more on Retirement Planning

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