Over 50 years, a drop from 10% to 9% reduces cumulative growth on $100,000 by $4.3 million or 43 times your investment.
That may surprise you, but it shouldn’t. It doesn’t take very much to see a dramatic change in your investments. And, if this is money that you are relying on for retirement, then it could also dramatically affect your lifestyle.
I think everyone should have two components to their financial plan in terms of generating future cashflow:
1) you should save money
2) you should invest some of your savings
Confused? Savings is not the same as investing…although most advisers will not make that distinction. What you may be told to look at is interest rates – not dollars and sense…errr cents. If your investments are earning 10%, calculate the fees you are being charged. Don’t assume that because the management fee is .5% that that is all you are being charged. It isn’t. What is the 12b-1 fee? Look at the total expense ratio. Subtract that from your interest earnings.
Most people find that 10% gross really only yields 8% net.
On the savings side…you don’t need to squirm when it comes to lower interest rates. To save money is really to preserve the value of what you have. So, the goals are a bit different.
The main purpose of having both savings and investments is that, by nature, most investments involve more uncertainty about future earnings, while savings is often associated with preserving what you have (making the most of what ya got). A good balance between the two means that you should have money when you need it before retirement (savings) and long-term capital appreciation (investments).
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This entry was posted on January 5th, 2012 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Insurance & Savings, Investing