Advising Clients since 1980

Fundamentals of Investing

Investing, whether for personal, retirement, tax strategies or other purposes is a science of principles. Once understood, these principles can be applied, implemented and monitored regularly to enhance the greatest likelihood of success while minimizing the potential of loss. Understanding these principles is simple but not easy. The skill comes not just from the understanding of the fundamental principles but the discipline to apply them whether times are good or bad. It also requires a willingness to assess what is really occurring rather than denying, hoping or rationalizing in either favorable or unfavorable market cycles.

Categories of Investing

The categories of investment are endless, both in terms of possibilities and in combinations of those possibilities. However, for the purposes of being able to break it down to the basics for the purposes of our readers, we are limiting these to two categories: personal (including estate, custodial, fiduciary and so on) and retirement (including IRA, 401K, 403B, pension and so on) investments. Returns on personal investments, also known as non-qualified investments for IRS purposes, are generally part of an individual's annual tax filing. Returns on retirement investments, also known as qualified investments for IRS purposes, are generally not part of the annual tax filing.

Quissett 03 - 6x1.jpg

Planning for Retirement Needs

The key to having a financially secure retirement is to plan for it now. Plenty of people think there is lots of time and plan (or don’t plan) to deal with it later. But the thing about retirement planning is that time either works for you or against you.

Time vs. Money

The sooner you start to invest in your retirement, the longer your contributions and the potential growth and income of those contributions can increase. Even modest amounts can compound to sizable sums with the passage of time.

It’s simple, really. The longer you wait (time), the more (money) you’ll need to save to reach your goal. Don’t get caught in a retirement time trap. If you wait too long to start saving, you may have difficulty catching up.

Importance of Goal Setting

But it’s not enough to just start early. As with any journey, unless you have a destination you’ll probably never arrive. So you must also set a retirement goal.

Three Important Questions
1. How much will I have when I retire?
2. What will my retirement income be?
3. Will I have enough to support my chosen lifestyle?

Cuttyhunk 01 - 6x1.jpg

Total Assets at Retirement Age
In addition to your current assets, you should have other assets in the form of retirement plan accounts, tax-deferred investments (like IRAs) and other taxable investments. To determine your total assets at retirement, add up the future value of all of your assets, including Social Security benefits. Then, estimate an annual retirement income, or the amount of money you intend to live on per year.

Determine Retirement Standards of Living
The standard of living you’ll be able to maintain once you retire will depend on your total assets at retirement. If you want to maintain your pre-retirement standard of living, you should plan on a retirement income equal to 60-80% of your pre-retirement income.

So, if you’re earning $50,000 a year now and you retired tomorrow, you’d need between $30,000 to $40,000 a year to maintain your standard of living.

Of course, the actual amount you’ll need depends upon your particular circumstances. For example, you may have refinanced your home at age 45 with a 30-year mortgage. At age 65, you’ll be facing 10 more years of mortgage payments and you may need more than 80% of your pre-retirement income to maintain your standard of living.

Reaching Retirement Goals
Many variables determine whether you’ll meet, exceed or fall short of your retirement income goal. These variables include:

  • How much you’ll save in the future

  • Your age today

  • Your retirement age (affecting not only how long you’ll have to accumulate your retirement nest egg but the number of years your nest egg needs to last)

  • Your life expectancy

  • How much you’ve already saved

  • How much you may inherit and when

  • Whether you want to leave an inheritance and how much

  • How your money is invested now and in the future

  • The rate of return (or growth) on your current and future assets

  • Future tax rates

  • Future inflation rates

  • What happens to the economy in general

Improving Chances of Reaching Retirement Goal
You are much more likely to achieve your retirement goal if you:

  • Start saving as soon as possible

  • Start saving as much as possible

  • Learn how tax-deferred and tax-free mutual funds can benefit you

Saving Sooner
The sooner you start saving and having your investments grow in value, the longer your money can work for you. This is vitally important, because time enables your savings to benefit from compound growth. Compound growth is the result of two factors the rate of return on your investments and the growth of reinvested returns. Plus, the longer your money has to grow, the better you’ll be able to weather the ups and downs of the economy.

Saving More
You may be able to increase the size of your savings without making major changes in your life. Cutting down on small everyday expenses such as coffee or soft drinks, or eating out may free up hundreds or thousands of dollars for your retirement.

Using Retirement Plans
With tax-deferred retirement accounts (such as 401(k) plans and SEP IRAs), you can invest money that you haven’t paid income tax on yet. Which means more money works for you as your investment grows. Income tax is due later, when you finally use the money for retirement and you’re most likely in a lower tax bracket.

Also, with many 401(k) and similar plans, employers fully or partially match your contributions which can boost your savings rate considerably.

Another kind of IRA, the Roth IRA, has a unique advantage: While your contributions are not deductible, your distribution from your Roth IRA may be tax-free.

A Final Reminder
Planning for retirement is a worthwhile investment of your time. And remember, time is a great ally to help you meet your retirement goal - if you plan for it now.

Wellfleet 04 - 6x1.jpg

Shoreline’s Competitive Edge
We are a network of independent professionals with over 150 years of combined experience in wealth management and advice. Members of this network can be used individually or collectively for a single program or a series of seminars or workshops for your company or organization.

For more information:
If you’d like more information about how diversified investment advisors can help you achieve your financial objectives through personalized wealth or retirement and risk management strategies, please contact us. We welcome the opportunity to discuss your unique needs and how we may best meet them.

This page is updated regularly so check in from time-to-time to see new articles and updates. You can click on any underlined words on each page to view a specific link or in the left margin of each page to explore a specific wealth management topic.

Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

The information contained in this web site is neither an offer nor solicitation of any security or service.

All photos courtesy of Shoreline Summit Photography