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Money, Investing and Time

April 19, 2012 | Comments: 0 | Views: 161

To retire comfortably, you must save, save, save...right! If you've heard it once, you've heard it a thousand times. The real question is, "Does saving by itself provide enough financial security for future retirement?" It really does depend on how long you will be in retirement, but more than likely, the answer is no. Although putting aside cash over time to increase your retirement "nest egg" is vital, it is very important that you begin the process as soon as possible. Time is the one commodity that cost you nothing, but can make you wealthy if you use it appropriately.

One thing you need to know about time is that when it comes to money, time is a double-edged sword. Time can help build wealth, but it can also affect monetary value in negative ways. Like most responsible Americans, Jack Penny was hardworking, but he did not understand or trust the banking and marketing systems. Jack worked from age 18 to 46 and had quite a few years to go before retiring. He was disciplined when it came to saving his money and managed to stash away $500,000 for retirement. Being afraid of banks and the sort, he kept his money locked away inside a safe in his basement. Jack figured that over the next 20 years, he would pay off his debts and when he turned 66, he would live on the money he saved. Not expecting to live past age 96, Jack figured he only needed about $16,675/year to live for 30 years. He felt quite confident in his ability to maintain his standard of living on the allowance he set for himself.

At first glance, Jack's logic appears to be in order. There is one small glitch, however. Jack did not take into consideration those factors that affect the value of his money over a long period of time. To be more precise, if left to itself, the true value of a dollar in hand today may be worth substantially less in the distant future. One of the main culprits for this decrease in value is inflation. Inflation is nothing more than prices increasing over time. The Consumer Price Index is a good indicator of current inflation. The average annual inflation rate from 1926 to the present is about 3.1%. In Jack's case, we must look at how inflation affects his savings over the fifty-year period.

Jack had the purchasing power of $500,000 at age 46, but at age 66, 20 years later, prices increased and inflation reduced the purchasing power of the same dollars to $266,345. As far as purchasing power goes, that only leaves Jack with about $8800/year. It gets worse. Because of withdrawals and the constant nibbling of inflation, the nest egg steadily decreases to $8600 in the second year, $8300 in the third and so on. This is far less than the $16,675/year he previously required for his golden years. The hard truth is Jack's money will run out of purchasing power before he runs out of life. Saving is good, but smart investing is better. You say you can't afford to invest. The truth is you can't afford not to...unless you want to end up like Penniless.

Source: EzineArticles
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