Chet Osterhoudt

Chet Osterhoudt

Turn time into an ally in your investing strategy

By Chet Osterhoudt
Business Column

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When used well, time can be your greatest gift in many walks of life – and that’s certainly true when you invest.

To illustrate the importance of time, let’s look at a scenario. Suppose you start saving for retirement when you are 25. You invest $3,000 per year in a tax-deferred investment, such as a traditional individual retirement account, and you hypothetically earn a 7 percent annual return. When you reach 65 and are ready to retire, you will have accumulated more than $640,000. (Keep in mind you will be taxed on withdrawals.)

Now, though, suppose you wait until you’re 55 before you start saving seriously for retirement. If you put that same $3,000 per year in the same IRA at the same hypothetical 7 percent return, you’d only end up with slightly more than $44,000 when you reach 65. To accumulate the $640,000 you would have gotten after 40 years by contributing just $3,000 per year, you would have had to put in about $43,500 per year for the 10 years between ages 55 and 65.

Clearly, it’s a lot easier to come up with $3,000 per year than $43,500. So, to accumulate the resources you need for a comfortable retirement, you’ll help your cause by saving and investing as early in your working life as possible – and then continue to save and invest right up to, and even during, your retirement years.

You also can use time as a target, or a way to frame a specific investment goal.

For example, suppose you have an 8-year-old child whom you want to send to college in 10 years. When that day arrives, wouldn’t it be nice to know that you’ve been saving money for a decade? One popular college savings vehicle is a 529 plan, which has high contribution limits and allows tax-free withdrawals, provided the money is used only for qualified higher education expenses. (Withdrawals for other purposes will be taxed and might be subject to a penalty.)

You also can use time as a signal to adjust your investment strategy. If you’re going to retire in, say, two or three years, you might want to shift some – but certainly not all – of your assets from growth-oriented investments to income-producing ones.

When you invest, make the best possible use of time – remember, it’s the one asset that can’t be replenished.

This column was provided by Edward Jones for use by Chet Osterhoudt, an investment representative for Edward Jones in Nashville.