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Saving Early & Letting Time Work for You

The earlier you start pursuing financial goals, the better your outcome may be.

 

Provided by MidAmerica Financial Resources

 

As a young investor, you have a powerful ally on your side: time. When you start saving and investing for retirement in your twenties or thirties, you can put it to work for you. 

    

The effect of compounding is huge. Most people underestimate it, so it is worth illustrating. We will use reasonable annual return rates to do so – we will assume an investor can earn an average of 6-7% a year on his or her portfolio.    

 

What if you invest $500 a month at age 25 & realize a 6% annual return? Under those hypothetical conditions, you would become a millionaire at age 65. To be precise, you would need to invest $499.64 per month starting at age 25 and keep it up for 40 years.1

 

At age 25, saving and investing $500 each month may seem like a luxury. It is closer to a necessity. In 2055, having $1 million or more saved up for retirement may be essential. Over 40 years, inflation will make $1 million worth less than it is today. The good news is that if your investments return more than 6% in a year, you could reach and surpass that $1 million mark faster.

 

It need not take 40 years for compounding to make a difference for you. Shortening the timeline of this hypothetical example, after ten years of saving and investing $500 a month at a 6% annual return, you would end up with $81,939.67 compared to the $60,000 you would realize from merely saving the cash sans investment.2

 

The earlier you start, the greater the compounding potential. If you start saving and investing for retirement in your twenties, you gain a definite compounding advantage over someone who waits to save and invest until his or her thirties. Another comparison bears this out.

 

Take two investors, both contributing $200 per month into their retirement accounts. One does this for 40 years starting at age 25. The other does this for 30 years starting at age 35. Again, we assume a 6% annual return for each account. The investor who starts at 25 winds up with $402,492 at age 65, while the one who started at 35 amasses just $203,118 over 30 years.3

     

Just ten years of difference in the start time, yet the money almost doubles by age 65. This is a compelling argument for starting to save for retirement (and other goals) as early as possible.

 

Even if you start early & then stop, you may out-save those who begin later. What if you contribute $5,000 to a retirement account yearly starting at age 25 and then stop at age 35 – no new money going into the account for the next 30 years? That is hardly ideal, yet should it happen, you still might come out ahead of someone who begins saving for retirement later.

 

As J.P. Morgan Asset Management research notes, an investor who consistently directs $5,000 a year in a retirement account from age 25-35 with a 7% continued annual return ends up with $602,070 at age 65 even if contributions cease after age 35. The really startling part: that investor actually amasses more retirement savings than an investor who steadily contributes $5,000 a year from age 35-65 at the same rate of return – he or she realizes just $540,741.1   

  

This is all worth noting, because many millennials seem wary of investing. This spring, a Bankrate MoneyPulse survey indicated that only 26% of Americans under age 30 are investing in equities. In July 2014, another Bankrate survey found that Americans 18-29 favored cash investments (i.e., bank accounts and bank-based investment vehicles) above all others. Student loans and child-rearing costs reduce investing potential for many millennials, but as these survey results hint, some are cynical about the whole investment process.4,5

 

If you were born in the late eighties to early nineties, you are old enough to remember the dot-com bust of the early 2000s and the crushing bear market of 2007-09. This may have given you an early negative view of equities; these events are clear examples of how risk plays a part in this type of investment.

 

The reality, though, is that most people planning for retirement need to build wealth in a way that outpaces inflation. Equity investing offers a route toward this objective, one many investors have taken. Directing your savings into equities can be helpful, because broadly speaking, you will not retire merely on the contributions you make to your retirement accounts. You will retire on the compounded earnings those invested assets achieve.

 

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

The above examples are for illustrative purposes only and not indicative of any investment. Actual results will vary. Assumes reinvestment of dividends with no consequence of fees or taxes.  Compounding refers to the process of earning return on principal plus the return that was earned earlier.

    

Citations.

1 - businessinsider.com/amazing-power-of-compound-interest-2014-7 [7/8/14]

2 - quickenloans.com/blog/investing-101-how-to-get-started [8/27/15]

3 - businessinsider.com/saving-at-25-vs-saving-at-35-2014-3 [3/25/14]

4 - cnbc.com/2015/08/24/more-millennials-say-no-to-stocks-and-advisors-adapt.html [8/24/15]

5 - bankrate.com/finance/consumer-index/financial-security-charts-0714.aspx [7/21/14]

 


Life Insurance with Long Term Care Riders

As conventional LTC policies grow costlier, alternatives have emerged.

 

Provided by MidAmerica Financial Resources

 

The price of long term care insurance is really going up. If you are a baby boomer and you have kept your eye on it for a few years, chances are you have noticed much costlier premiums for LTC coverage today compared to several years ago. For example, in 2015 the American Association for Long-Term Care Insurance found that married 60-year-olds would pay $2,170 annually to get a total of $328,000 of coverage.1

 

As CNBC notes, about three-quarters of the insurers that sold LTC policies ten years ago have stopped doing so. Demand for LTC coverage will only grow as more baby boomers retire – and in light of that, insurance providers have introduced new options for those who want to LTC coverage.1

   

Hybrid LTC products have emerged. Some insurers are structuring “cash rich” whole life insurance policies so you can tap part of the death benefit while living to pay for long term care. You can use up to $330 a day of the death benefit under such policies, with no reduction to the cash value. Other insurance products are being marketed featuring similar potential benefits.2

 

This option often costs a few hundred dollars more per year – not bad given that level annual premiums on a whole life policy with a half-million or million-dollar payout often come to several thousand dollars. The policyholder becomes eligible for the LTC coverage when he or she is judged to require assistance with two or more of six daily living activities (dressing, bathing, eating, etc.) or is diagnosed with Alzheimer’s disease or some other kind of cognitive deficiency.2

   

This way, you can get what you want from one insurance policy rather than having to pay for two. Contrast that with a situation in which you buy a discrete LTC policy but die without requiring any long term care, with the premiums on that policy paid for nothing.  

 

The basics of securing LTC coverage applies to these policies. As with a standard LTC policy, the earlier you start paying premiums for one of these hybrid insurance products, the lower the premiums will likely be. You must pass medical underwriting to qualify for coverage. The encouraging news here is that some people who are not healthy enough to qualify for a standalone LTC insurance policy may qualify for a hybrid policy.3

 

These hybrid LTC products usually require lump sum funding. An initial premium payment of $50,000 is common. Sometimes installment payments can be arranged in smaller lump sums over the course of a few years or a decade. For a high net worth individual or couple, this is no major hurdle, especially since appreciated assets from other life insurance products can be transferred into a hybrid product through a 1035 exchange.1,3

     

Are these hybrid policies just mediocre compromises? They have detractors as well as fans, and the detractors cite the fact that a standalone LTC policy generally offers greater LTC coverage per premium dollar paid than a hybrid policy. They also cite their two sets of fees, per their two forms of insurance coverage. While it is possible to deduct the cost of premiums paid on a conventional LTC policy, hybrid policies allow no such opportunity.3

 

Paying a lump sum premium at the inauguration of the policy has both an upside and a downside. You will not contend with potential premium increases over time, as owners of stock LTC policies often do; on the other hand, the return on the insurance product may be locked into today’s (minimal) interest rates.

 

Another reality is that many middle-class seniors have little or no need to go out and buy a life insurance policy. Their heirs will not face inheritance taxes, because their estates aren’t large enough to exceed the federal estate tax exemption. Moreover, their children may be adults and financially stable themselves; a large death benefit for these heirs is nice, but the opportunity cost of paying the life insurance premiums may be significant.4

 

Cash value life insurance can be a crucial element in estate planning for those with large or complex estates, however – and if some of its death benefit can be directed toward long term care for the policyholder, it may prove even more useful than commonly assumed.

   

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 - cnbc.com/2015/08/07/fer-more-products-that-cover-long-term-care-costs.html [8/7/15]

2 - consumerreports.org/cro/news/2015/04/get-long-term-care-from-whole-life-insurance/index.htm [4/16/15]

3 - tinyurl.com/o3ty2j3 [5/4/14]

4 - marketwatch.com/story/hedging-your-bets-on-long-term-care-2013-11-06 [11/6/13]

 





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