New Business Ideas and Concepts

Accept it many of you are now spending on bills to pay for what you have wanted for years and now you can finally afford it. The last thing you will thing about is an investment for your retirement. It is your choice whether to have fun with spending money now but suffer when you get older or inverse! Take some advice from those with a little more experience: Start investing early in your career. Start from day one and you will never miss that money you’re setting aside. If your company has available a 401-K or a TSP program, jump on the band wagon immediately. If you don’t have these programs at your disposal, you can still start an IRA and the concepts stated here are applicable as well.

I can guarantee that it really does it make a difference when you start contributing. It is important to invest in your retirement account early in your career for two reasons. First, if you’re fortunate to receive matching contributions, you don’t want to miss out on those added contributions that are a significant part of your retirement benefit. Second, the longer contributions stay in your account, the more you stand to gain. Your money makes money in the form of earnings, and those earnings in turn make money, and so on. This is what is known as the “miracle of compounding.” As money grows in your account over time, the proportion resulting from earnings will become larger compared to the proportion resulting from contributions.

The size of your account balance is going to depend on how much you (and your company if they match funds up to a certain percentage) contribute to your account and how your account grows as a result of earnings on your investments. To get an idea of what your retirement account could be in the future, look at the following projections.

Think this way. Assume that you are an employee eligible for organizational contributions, that you are earning $28,000 each year, and that you receive no future salary increases. You choose to save 5 percent of basic pay each pay period; therefore you receive total organizational contributions of 5 percent. The growth projections below are for an assumed annual rate of return of 7 percent on your investments.

After five years your account balance would be almost $17,000; after ten years your balance would increase to $40,000; and after contributing for twenty years, your account would have a balance of $122,000. Clearly your balance would continue to increase each year. If you contributed for forty years, which is fathomable if you start a job at 23 and want to retire at age 63, your account balance would be $615,000. That’s over half a million dollars folks! Just from contributing 5% of your income from the day you start work!

If the Enron and WorldCom scandals have taught investors anything, it is that betting your future solely on one company’s stock is a huge mistake.

In fact, talk to any financial adviser and the mantra these days is diversify, diversify, diversify. But to average investors, that’s not so simple. What exactly does that mean and how do they go about doing it?

Asset allocation means spreading out your money across different asset classes (such as stocks, bonds and cash) and within each asset class (not buying just one type of stock, bond or mutual fund). The idea is that when one asset class falls, another may rise, which cushions the portfolio.

“At minimum, a moderate investor would probably want to hold five asset classes: large-capitalization stocks, small-capitalization stocks, international stocks, bonds and cash,” said Roger Ibbotson, chairman and founder of the asset allocation firm Ibbotson Associates and finance professor at the Yale School of Management.

But diversification is not always easy or cheap. About 75 percent of mutual funds have minimum investment requirements of $1,000 or more, according to the Investment Company Institute. For a moderate investor, building a diversified portfolio can mean a large initial investment.

“A reasonable allocation might be 38 percent large-cap, 7 percent small-cap, 15 percent international, 30 percent bonds and 10 percent cash,” Ibbotson said. “But if the minimum investment is $1,000 per mutual fund, you would need more than $14,000 to invest in those proportions.”

But fear not, there may be a simple solution: a fund of funds. Commonly called lifecycle funds, lifestyle funds, target maturity funds or balanced funds, these investment products are whole diversified portfolios. Investors can select a fund of funds based on time horizon (when you’re going to retire) or how much risk you can tolerate.

With one purchase, investors can get access to a diversified portfolio designed by professional money managers such as Old Mutual, Pioneer Investments and AIG SunAmerica, who have partnered with Ibbotson Associates to help create these fund offerings. Funds of funds can be thought of as one-stop shopping for your investment dollars.