Adrian A. Hedwig
Financial Advisor, CUSO Financial Services, L.P.*
Available at all Salal Credit Union branches
For long-term investment goals such as retirement, time can be one of your biggest advantages. That’s because time allows your investment dollars to do some of the hard work for you through a mathematical principle known as compounding.
The snowball effect
The premise behind compounding is fairly simple. You invest to earn money, and if those returns are then reinvested, that money can also earn returns.
For example, say you invest $1,000 and earn an annual return of 7% — which, of course, cannot be guaranteed. In year one, you’d earn $70 and your account would be worth $1,070. In year two, that $1,070 would earn $74.90, which would bring the total value of your account to $1,144.90. In year three, your account would earn $80.14, bringing the total to $1,225.04 — and so on. Over time, if your account continues to grow in this manner, the process can begin to snowball and potentially add up.
Time and money
Now consider how compounding works over long time periods using dollar-cost averaging (investing equal amounts at regular intervals), a strategy many people use to save for retirement.1 Let’s say you contribute $120 every two weeks. Assuming you earn a 7% rate of return each year, your results would look like this:
|Time period||Amount invested||Total accumulated|
After 10 years, your investment would have earned almost $14,000; after 20 years, your money would have more than doubled; and after 30 years, your account would be worth more than three times what you invested.2 That’s the power of compounding at work. The longer you invest and allow the money to grow, the more powerful compounding can become.
The cost of waiting
Now consider how much it might cost you to delay your investing plan. Let’s say you set a goal of accumulating $500,000 before you retire. The following scenarios examine how much you would have to invest on a monthly basis, assuming you start with no money and earn a 7% annual rate of return (compounded monthly).
|Time frame to retirement||40 years||35 years||30 years||25 years|
|Retirement accumulation goal||$500,000||$500,000||$500,000||$500,000|
|Annual rate of return||7%||7%||7%||7%|
|Monthly contribution needed||$190||$278||$410||$617|
So the less time you have to pursue your goal, the more you will likely have to invest out of pocket. The moral of the story? Don’t put off saving for the future. Give your investment dollars as much time as possible to do the hard work for you.
1Dollar-cost averaging does not ensure a profit or prevent a loss. It involves continuous investments in securities regardless of fluctuating prices. You should consider your financial ability to continue making purchases during periods of low and high price levels. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Review your progress periodically and be prepared to make adjustments when necessary.
2Assumes 26 contributions per year, compounded bi-weekly.
These hypothetical examples are used for illustrative purposes only and do not represent the performance of any specific investment. Fees and expenses are not considered and would reduce the performance shown if they were included. Actual results will vary. Rates of return will vary over time, particularly for long-term investments. Investments with the potential for higher rates of return also carry a greater degree of risk of loss.
Four Points to Consider When Setting a Retirement Income Goal
1. When do you plan to retire?
The first question to ponder is your anticipated retirement age. Many people base their target retirement date on when they’re eligible for full Social Security benefits, and for today’s workers, “full retirement age” ranges from 66 to 67. Other folks hope to retire early, while still others want to work as long as possible. As you think about your anticipated retirement date, keep the following points in mind.
If you plan to retire early, you’ll need significant resources to provide income for potentially decades. You can typically tap your employer-sponsored retirement plan without penalty as early as age 55 if you terminate your employment, but if you try to access IRA assets prior to age 59½, you will be subject to a 10% early withdrawal penalty, unless an exception applies. In both cases, regular income taxes will apply. Also consider that you generally won’t be eligible for Medicare until age 65, so unless you are one of the lucky few who have employer-sponsored retiree medical benefits, health insurance will have to be funded out of pocket.
If you plan to delay retirement, consider that unexpected circumstances could throw a wrench in that plan. In its 2017 Retirement Confidence Survey, the Employee Benefit Research Institute (EBRI) found that current workers plan to retire at a median age of 65, while current retirees reported a median retirement age of 62. And although four in 10 workers plan to work until age 70 or later, just 4% of retirees said this was the case. Why the difference? Nearly half of retirees said they retired earlier than planned, with many reporting unexpected challenges, including their own health concerns or those of a family member.1
2. How long will your retirement last?
The second important consideration, which builds on the first, is how long your retirement might last. Projected life spans have been lengthening in recent decades due in part to advancements in medical care and general health awareness. According to the National Center for Health Statistics (NCHS), a 65-year-old woman can expect to live 20.6 more years, while a 65-year-old man can expect to live 18 more years.2 To estimate your own life expectancy based on your current age and health profile, visit the online longevity calculator created by the Society of Actuaries and American Academy of Actuaries at longevityillustrator.org.
3. What will your expenses look like?
The third consideration is how much you will need to meet your basic living expenses. Although your housing, commuting, and other work-related expenses may decrease in retirement, other costs — including health care — will likely rise.
In 2017, EBRI calculated that Medicare recipients with median prescription drug expenses may need about $265,000 just to pay for basic medical expenses in retirement.3 And that doesn’t even include the potential for long-term care. According to the Department of Health and Human Services (HHS), 52% of people over age 65 will need some form of long-term care during their lifetimes, which could add another $69,000, on average, to the out-of-pocket costs.4
In addition, remember to account for the impact inflation will have on your expenses over time. For example, say you need an estimated $50,000 to cover basic needs in your first year of retirement. Ten years later, at a 3% annual inflation rate (the approximate historical average as measured by the consumer price index), you would need more than $67,000 to cover those same costs.
4. How much can you accumulate?
This is perhaps the most important consideration: How much can you realistically accumulate between now and retirement based on your current savings rate, timeframe, investment portfolio, and lifestyle? Once you project your total accumulation amount based on current circumstances, you can gauge whether you’re on track or falling short. And if you appear to be falling short, you can begin to think about how to refine your strategy, either by altering your plans for retirement (e.g., delaying retirement by a few years), saving more, or investing more aggressively.
1EBRI Issue Brief, March 21, 2017
2NCHS Issue Brief, Number 293, December 2017
3EBRI Notes, January 31, 2017
4HHS, “Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief,” February 2016
The Markets (as of market close March 29, 2018)
The first quarter of 2018 began as the fourth quarter of 2017 ended: with strong market gains. The Nasdaq led the way by the end of January, posting a monthly increase of almost 7.40%, followed by the large caps of the Dow (5.79%) and the S&P 500 (5.62%). The employment sector remained strong, with 239,000 new jobs added in January and average hourly earnings climbing 0.3%. Consumer prices rose 0.5% in January, while personal income increased 0.4%. The trade gap continued to widen, which has proven to be a focal point of the current administration. Nevertheless, consumer confidence in the economy increased in January with expectations for continued strengthening in the coming months.
Volatility returned to the stock market in February, with each of the benchmark indexes listed here posting notable losses from the prior month. Nasdaq, while down, fared better than the large caps of both the S&P 500 and the Dow. Investor concerns over rising inflation and interest rates seemed to trigger volatility. A strong labor report in February revealed a 2.9% increase in average hourly wages over a year earlier, the addition of 313,000 new jobs, and decreasing unemployment insurance claims. These factors combined to prompt investors to conclude that higher labor costs may eat into corporate profits, which might prompt the Fed to raise interest rates at a faster pace. February also saw long-term bond yields surge as evidenced by a 16-basis-point increase in yields for 10-year Treasuries, as bond prices fell.
While many markets closed for Good Friday, March was not a good month for the benchmark indexes listed here, except for the small caps of the Russell 2000. Otherwise, each of the indexes closed March in the red, led by the Dow, which was followed by the Global Dow, Nasdaq, and the S&P 500. March brought more concerns for investors with the administration’s imposition of tariffs on steel and aluminum imports and the threat of a trade war with China. Much of the month saw retaliatory threats lobbed across the Pacific.
The first quarter as a whole saw only the Nasdaq post modest gains. The Dow fell by almost 2.50% by the end of the quarter, far outpacing losses suffered by the other indexes listed here. The Global Dow fell nearly 2.0%, followed by the S&P 500 and the Russell 2000. Prices for 10-year Treasuries fell by the end of the quarter, pushing yields up by 32 basis points. Crude oil prices closed the month and quarter at about $64.91 per barrel by the end of March. Oil began the quarter at $61.55 per barrel and remained over $60.00 for much of the first quarter. Gold closed the quarter at roughly $1,329.60 — ahead of where it opened the quarter ($1,305.10). Regular gasoline, which was $2.548 per gallon on February 26, soared to $2.648 on the 26th of March.
As of March 29
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Monthly Economic News
- Employment: Total employment rose by 313,000 in February following January’s upwardly revised total of 239,000. Employment gains occurred in retail trade, construction, professional and business services, and manufacturing. The unemployment rate remained at 4.1%. In February, total employment rose by 785,000. Over the year, the number of long-term unemployed was reduced by 369,000. The labor participation rate rose to 63.0%. The employment-population ratio increased to 60.4% in February. The average workweek for all employees increased by 0.1 hour to 34.5 hours in February. Average hourly earnings increased by $0.04 to $26.75. Over the year, average hourly earnings have risen $0.68, or 2.6%.
- FOMC/interest rates: The Federal Open Market Committee, meeting for the first time under new chair Jerome Powell, increased the federal funds target rate range by 25 basis points to 1.50%-1.75%. The Committee said the labor market is strong, but economic activity was described as “moderate.” Inflation has moved little since the beginning of the year, yet the Committee expects prices to move up gradually over the next 12 months. The Committee forecasts more rate hikes throughout the remainder of 2018.
- GDP/budget:The third and final estimate of the fourth-quarter gross domestic product showed expansion at an annual rate of 2.9%, according to the Bureau of Economic Analysis. The third-quarter GDP grew at an annualized rate of 3.2%. Consumer spending rose 4.0%, with notable increases in durable goods spending (13.7%). As to the government’s budget, February’s deficit surged to $215.25 billion, compared to January’s deficit of $49.2 billion. The fiscal 2018 deficit (which began in October 2017) is $390.97 billion — an increase of $40.35 billion, or 11.5%, above the deficit over the same period last year.
- Inflation/consumer spending: Inflationary pressures continued to show upward momentum in February. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up 0.2% for February following a January gain of 0.4%. The core PCE price index (excluding energy and food) also jumped ahead 0.2% in February. Personal (pre-tax) income increased 0.4% and disposable personal (after-tax) income climbed 0.4% over the prior month. Personal consumption expenditures (the value of the goods and services purchased by consumers) climbed 0.2% in February, the same increase as the prior month.
- The Consumer Price Index rose 0.2% in February after climbing 0.5% in January. Over the last 12 months ended in February, consumer prices are up 2.2%. Core prices, which exclude food and energy, are up 1.8% for the year.
- The Producer Price Index showed the prices companies receive for goods and services also jumped 0.2% in February. Year-over-year, producer prices have increased 2.8%. Prices less food and energy increased 0.2% for the month and are up 2.5% over the last 12 months.
- Housing: Home sales were a mixed bag in February. Total existing-home sales jumped 3.0% in February following a 3.2% dip in January. Year-over-year, existing home sales are up 1.1%. The February median price for existing homes was $241,700, which is 5.9% higher than the February 2017 price of $228,200. Inventory of existing homes for sale rose 4.6%, representing a 3.4-month supply. New home sales fell in February. The Census Bureau’s latest report reveals sales of new single-family homes fell 0.6% in February. The median sales price of new houses sold in January was $326,800 ($323,000 in January). The average sales price was $376,700 ($382,700 in January). There were 305,000 houses for sale at the end of February, which represents a supply of 5.9 months at the current sales rate.
- Manufacturing:Industrial production edged up in February, increasing 1.1% compared to a downward-revised 0.3% drop in January. Manufacturing output grew at a rate of 1.2% — its largest gain since October. Capacity utilization for manufacturing also rose 0.7 percentage point in February, coming in at 78.1% — its highest reading since January 2015. New orders for manufactured durable goods climbed 3.1% in February following a 3.5% revised January decrease. For the year, new durable goods orders are up 8.9%.
- Imports and exports:The advance report on international trade in goods revealed that the trade gap increased in February from January, rising from $75.3 billion to $75.4 billion. Exports of goods for February jumped 2.2% following January’s 2.4% drop. Imports of goods increased 1.4% after falling 0.2% in January. Still, total imports ($211.9 billion) far exceeded exports ($136.5 billion). Prices for both imported and exported goods and services advanced in February. Import prices rose only 0.4% for the month, while export prices increased 0.2%. For the year, import prices climbed 3.5%, while export prices jumped 3.3%.
- International markets:Heightened worries of a trade war dominated international markets, as tariffs imposed by the United States on steel and aluminum went into effect. Trade with China became testy as President Trump announced tariffs on Chinese goods, prompting China to impose tariffs on U.S. imports. Elsewhere, the Bank of England maintained its monetary policy, leaving interest rates at 0.50%. The bank rate has not increased since last November. However, it appears interest rates are going up at some point this year. Most foreign stock indexes were subdued for March, with only a few countries’ indexes making marginal gains. European stocks dipped to lows approaching early 2017 values. Most major Japanese indexes are well in the red year-to-date, while China’s benchmark stock index has felt the brunt of the apparent trade war with the United States.
- Consumer sentiment:Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, decreased in March following an increase in February. The index sits at 127.7, down from 130.8 in February (an 18-year high). According to the report, consumer expectations were less positive in their assessment of current economic conditions, while consumers’ short-term expectations were tempered as well.
Eye on the Month Ahead
Moving to the second quarter of the year, the economy is expected to maintain its course of relative strength. However, if news out of Washington continues to concern investors, market volatility is likely to prevail.