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The Word "Retirement"

The Word

The word ?retirement? brings great worry to many Baby Boomers. They often worry if they will be able to retire and if they can retire, how much money will they need to have in savings and investments.

Let's discuss how much a person needs to invest on a monthly basis in order to feel financial freedom in their retirement years. Let me first say, it is never convenient to invest. There will always be something that you can spend your money on. Money is easy to spend and there is never enough. That is why everyone needs to find out how much they need to invest on a monthly basis and then pay themselves first. This is why the 401-k is so valuable to all of us. We can tell our employers how much we want to save and they will take it right out of our paychecks before we even see it. We all learn to live without it and we all should be better off in the long run because of it. So let's talk about retiring; the average American has a realistic goal of retiring at the age of 65. You may like to retire earlier and that is fine, it just means that you will need to invest much more on a monthly basis than you normally would.

Who doesn't want to be a millionaire? Although a million dollars is not what it once was, for some people it is still sufficient enough for a comfortable retirement. We can mathematically find out how much a person needs to invest on a monthly basis assuming a steady rate of return in order to have $1,000,000 by the time they turn 65.
  • A Twenty Five year old would need to invest just $157 per month for 40 years to have $1,000,000.
  • A Thirty Five year old would need to invest $439 per month for 30 years to have $1,000,000
  • A Forty Five year old would need to invest $1,306 per month for 20 years to have $1,000,000
(Assuming that their investments will be growing by 10% per year on average.)

By looking at the figures above, you can see that time can either work for you or against you. The earlier you start the less you need to put away. If you are thinking that $1 million will not be enough for you, then double the monthly numbers to calculate what you would need to do to reach $2 million. The moral of the story is to start earlier not later.

Half the battle of becoming financially independent is having the discipline to invest the money on a monthly basis. The other half of the battle is to allocate the money in a diversified manner to get you a long-term desired growth rate.

Remember, it is easy to make money when the stock market is going up like in the 1990's. Everyone looked like they knew what they were doing but most were just getting lucky. The true art of investing comes into place when the markets are declining in value like they were from 2000 to 2003. In times of recession the name of the game is capital preservation. This is why every person's portfolio should be well diversified among stocks and bonds. Stocks will make you money when the markets go up and bonds will protect it when they go down. The younger you are the more you should have in stocks (you can afford some volatility in the markets), but as you get closer to retirement you should have more in bonds.

Within your stock holdings you should diversify between large, mid, small and international companies. You should not expect all of your different assets to make you money all the time. You want investments that are dissimilar so when one is up the other one is down. Every asset has times of great appreciation and terrible depreciation. No one can predict the future and no one can predict what will make money from one day to the next. Therefore, if you have a little bit of everything in your portfolio you can avoid the peaks and valleys of the markets and have a more consistent growth pattern.

All great things come in time, not overnight. There is no magic formula to get rich quick. It is all about being a disciplined, patient, long-term investor. If you start early, chart out how much you need to invest, and stay well diversified, there is no reason why you can't accomplish your retirement goals.

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