What Is Investing?

The concept of investment is actually quite simple: investing means putting your money to work for you. Basically speaking, investing is another way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working, and that's exactly what most of us do. There is nothing wrong with this way of thinking, but in order to make more money, we'd have to work more hours. However, there is a limit to the number of hours that can be worked in a day, not to mention the fact that having a great deal of money is no fun if we don't have the leisure time to enjoy it.

You can't clone yourself to increase your working time, so instead, you need to have an extension of yourself - your money - working for you. That way, while you are putting in hours for your employer, working in the garden, sleeping, reading the paper or socializing with friends, your investments can be earning you money. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job.

There are many different ways you can go about making an investment. This includes putting money into a money market, stocks, bonds, mutual funds, annuities, ETF's, real estate or starting your own business. Sometimes people refer to these options as "investment vehicles," which is just another way of saying "a way to invest". Each of these vehicles has various pros and cons, depending on who you talk to, but it doesn't matter so much which method you choose for investing your money, the idea is to have your money working for you so it creates wealth. Even though this is a simple idea, it's the most important concept about investing.

What Investing Is Not:

Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino.

True investing doesn't happen without some action on your part. An investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still are risks, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.

Why Bother Investing?

Obviously, everybody wants more money. It's pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not just a helpful tool, but rather the only way to afford to retire and maintain their present lifestyle.

Whether you live in the U.S., Canada, or pretty much any other country in the industrialized Western World, governments are tightening their belts. Almost without exception, the responsibility of planning for retirement is shifting away from the state and towards the individual. There is much debate about how safe our old-age pension programs will be over the next 20, 30 and 50 years. But why leave it to chance? By planning ahead you can ensure financial stability during your retirement. (For more, see Jersey Benefits Group, Inc.)

John Kaighn

Jersey Benefits Advisors

John Kaighn's Guidance Website

Using Systematic Payouts for Income

While there is no “one size fits all” model which can be used to determine the savings necessary for the retirement years, there are some benchmarks and rates of return, which are realistic measures for making projections. Most of us don’t want to see our standard of living and quality of life deteriorate during our retirement years, so retirement income needs to be close to working income, especially if travel or vacation homes are included in those retirement dreams. However, most defined benefit plans have a payout ranging from 40% - 80% of working income, with most being closer to the lower end of the range. Many companies have stopped using defined benefit plans all together, opting to utilize defined contribution plans, such as the 401k, SIMPLE or SEP.

So what is a realistic rate of return and retirement asset goal? Let’s look at the rate of return first. Prudent advisors and investors realize long term averages have to be considered in making projections, and 8% has been the rule of thumb used for calculating investment rate of return. This is based on long term bond performance. The historical return for the stock market has been closer to 10%. How much do you need for a comfortable retirement? That is a personal question for each retiree, but I’ll run through a couple of scenarios to show how systematic payouts from your investments can help stretch out your income. A systematic payout is basically reverse dollar cost averaging. It means taking withdrawals of retirement income on a monthly basis, the same way the money was saved prior to retirement. The type of investment vehicle could be a rollover IRA, which receives defined contribution balances after retirement, or when changing jobs.

If you have saved $750,000 by the tme you are ready to retire, and draw 10%, or $75,000 annually, and you earn a rate of return equal to 8% annually, the money will last 18 years. The same $750,000 in the Growth Fund of America, using the returns of the last ten years, which include the bear market’s losses, and gaining only 8% thereafter, would last 25 years. If a client placed the $750,000 in one of the newer annuities, with the Guaranteed Minimum Income Benefit, and draws 6% a year, which is $45,000, and the GMIB return is 6% a year, the balance will never fall below $750,000. Therefore, the client’s heirs would get the $750,000 as a death benefit and possiby more, if the market returned more than the 6% GMIB.

While there are concerns about the solvency of Social Security, my feeling is the government will keep the social pact it has made with the workers of this country, and maintain some form of retirement benefits for its citizens, even if the age of retirement is extended and benefits are not as generous as today.

John H. Kaighn

Jersey Benefits Advisors

Middle Twp. Middle School Guidance Department

How Much Should I Save Per Paycheck to Reach My Retirement Goals?

Here is another investment blog I've read recently by Hank, and I thought I'd include it, because he makes some good points about how important compounding is for young investors. The younger you are when you start saving, the larger the nest egg will be when you reach retirement age. Here is Hank's post:

This question is another tricky one because it depends on who is asking it. If you’re 18 and asking this question, well, I’d say you’re starting off right by asking, and if you are putting away 10% - even if you’re only making $20,000 per year, you’re saving $2,000/year and in 50 years you’d be sitting on about $2,500,000 at 10% (yes, that is 2 MILLION off someone that makes $20,000 per year). You’d have put in $100,000 and interest would have accounted for the other $2,400,000 of it. Ridiculous how compoud interest works, eh?

If you bump it to 15%, you’d be investing $150,000 and your egg would be almost 66% larger at $3,800,000! Obviously this is taking some big assumptions, being that you’re going to continue making $20,000 for the next 50 years (which I hope you’d get a raise in there at some point), the return will be 10% (this can go up and down, but it’s a safe figure to estimate by, as another tangent, if your return is 15%, and investing $2,000 per year, you’re looking at almost $16,000,000), and it isn’t taking into account inflation (usually around 3% which would peg that 16MIL down to about 4.5MIL). But that’s all you really CAN do with 50 years to play with, however, that’s the big thing, get in early.

If you’re 40 years old and wondering where to start, you’re going to certainly need some catch up against the 18 year old putting in 10%; to match with the 18 year old investing $2000/year, you’re going to need to put in $17,000 per year to hit that 2.5million plateau. Attainable yes, but preferred, probably not. Even at 40 years old and investing $2000/year you’re still going to be looking at $300,000 by 68, which isn’t bad, and is much better than $0.

A good rule of thumb I’ve read is 10% minimum, and 15-25% preferred of your salary should go to retirement. But that, of course is an estimate and should vary depending on your age - I’d say a better breakdown would be:
18-30 years old - 10-15% of your salary
30-40 years old - 12-18% of your salary
40-50 years old - 18-25% of your salary
50+ - 25% or more of your salary

Again, they’re estimates based on a lot of generalization, but the big key is start stuffing something, even if it’s not much. It’s amazing what time can do to the almighty $.

Author: hank

John Kaighn

Jersey Benefits Advisors

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