Time Is on Your Side, Yes It Is.
The Rolling Stones released Time Is on My Side in 1964 and this classic song has been entertaining fans ever since. The Rolling Stones have defied time as they’ve been playing music together for 55 years. Time certainly has been on the side of the Rolling Stones.
For investors, time can be a blessing or a curse. The sooner you start investing the more money you’ll have for retirement. The opposite is also true: the longer you wait to start investing, the less money you’ll have for retirement. If you start saving $1,000 per month at age 30, it will grow to $2.26 million at age 60. If you wait until age 45 to start saving a $1,000 per month, it will grow to $415,000. Waiting 15 years to start investing has reduced your nest egg by 82% or $1.845 million.[1]
Timing also will play a significant role in your financial success. From 1970 to 2015 the S&P 500 generated an average annual return of 10.27% but if you missed the 25 best days during this stretch, your return dropped to 6.87% per year.[2] Trying to time the stock market can have adverse consequences to your portfolio so focus on a more prudent strategy like buy and hold.
Knowing your time horizon is paramount when building your investment portfolio. If your time horizon is 1 to 3 years, buy safe investments like CDs and U.S. Treasury Bills. These safe investments will give you access to your money with little, if any, downside risk. If your time horizon is 3 to 10 years, invest in corporate bonds, tax free bonds or common stocks. A large allocation to common stocks is recommended if your time horizon is 10 years or more.
Longevity risk is a concern for many as people are living longer meaning they may outlive their financial resources. Time may be a problem for retirees who try to find a balance between generating income today and preserving assets for tomorrow. Owning a basket of common stocks may offset longevity risk. Another option is to purchase a deferred income annuity, or longevity annuity, which provides income to individuals age 80 to 85 or older. Longevity risk isn’t going away as the number of people reaching age 100 has grown by 44% from 2000 to 2017![3]
Your Social Security payment can also benefit from the gift of time. Individuals are eligible to receive their Social Security benefit at any time between the ages of 62 and 70. Your largest benefit will come at age of 70 and your smallest benefit will be at age 62. For example, a monthly benefit of $1,600 at age 62 may rise to $3,000 at age 70. By waiting eight years to receive your benefit, you’ve put an extra $1,400 per month in your pocket. A Social Security optimization analysis can help you determine the right time for you to initiate your benefit.
When it comes to investing you can’t always get what you want as investors must decide how much money to allocate between stocks, bonds and cash. Investing for safety, income or growth has pros and cons but all three are needed for long term financial success. When stocks rise, investors question the wisdom of owning bonds and when stocks fall, investors question the wisdom of owning stocks. A diversified portfolio of stocks, bonds and cash based on your risk profile may assist you in staying invested for the long haul regardless of what markets are doing.
Time marches on so make sure it’s working for you and not against you. Let the long-term trend of the stock market and father time help you create wealth.
You've got the sun, you've got the moon, and you've got the Rolling Stones. ~ Keith Richards
So teach us to number our days that we may get a heart of wisdom. ~ Psalm 90:12
Bill Parrott is the President and CEO of Parrott Wealth Management, a fee-only, fiduciary financial planning and investment management firm. For more information, please visit www.parrottwealth.com.
October 30, 2017
Note: Your returns may differ than those posted in this blog and past returns aren’t a guarantee for future returns.
[1] FV calculation with a 10% return, no taxes or fees have been applied to the calculation.
[2] Dimensional Fund Advisors Investing Profiles
[3] http://www.cnn.com/2016/01/25/health/centenarians-increase/index.html, Carina Storrs, 1/25/2016.