Most people have long-term goals: Buying a home, starting a business, sending the kids to college, enjoying a comfortable retirement. But too often they delay taking the steps necessary to turn their dreams into realities. In today's fast-paced world, many people put off important decisions until another day. Unfortunately, by the time they realize the urgent need to save money, it's often too late to fully realize those goals.
Time Is on Your Side
Fortunately, early planning can help you maximize the power of time and reach your financial goals. It's simple: The sooner you begin to save for your future financial needs, the more wealth you can accumulate.
Although the idea is straightforward and logical, most people fail to recognize the enormous increase in value that can result from beginning to save early. The best way to demonstrate the power of time is by way of example. Let's look at the different approaches to investing taken by twin sisters, Sara and Ann.
Sara Started to Save Early
Looking to build a large nest egg for her retirement, Sara chose to invest $1,000 per year in an Individual Retirement Annuity (an IRA funded by an annuity), starting at age 30. She continued her payments for 10 years until age 40, earning an average of 6% per year on her investments.1 At age 40, she stopped contributing to the IRA, but-and here's the key -- she left her $11,000 of contributions in the account, plus earnings, until retirement at age 65.
Ann Started to Save Late
Ann, the second twin, was also a bright girl who saw the need to put money away for her retirement. But she was a bit of a procrastinator and didn't begin implementing her investment plan until she was 45. At that point she began investing $1,000 a year in an IRA. She also averaged a 6% annual return, but continued to make $1,000 investments for 20 years until she retired at age 65. Her contributions over the years totaled $20,000.
The Power of Compounding Interest
Given the fact that Ann contributed $9,000 more than Sara, you might expect that Ann would have a significantly greater total for retirement at age 65. Surprisingly, just the opposite is true. Assuming the tax-deferred IRA of each twin earned 6% a year, at age 65 the account balance for Sara would be $68,117, while Ann would have only $38,993. The hypothetical chart above vividly illustrates the sizable difference in the accumulated wealth of the sisters. What happened?
"Earnings Earn Earnings"
Ann was on the right track. She invested steadily and wisely, earning good returns. But she made a big mistake: She got a late start. So, though she invested almost twice the amount her sister Sara did, she had less money to enjoy at retirement. Now look at her twin's experience. By getting an earlier start, Sara benefited from 15 more years of compounded interest. Left to accumulate in her account, the earnings from her early years earned additional returns.
Is Postponing the Purchase of Life Insurance Wise?
Let's consider another example. This will show you how postponing the purchase of life insurance to a perceived "better time" can be costly. Trish has identified the need for $250,000 of permanent life insurance coverage and is considering buying a $250,000 whole life policy. This policy would provide immediate insurance protection and offer guaranteed cash value accumulation that she could later borrow against2 to help purchase a condominium or help supplement her retirement income. At age 40, Trish's annual premium would be $4,000, but she's debating whether or not to wait five years, at which point her premium would be $5,000. Looking at both scenarios over the long term, total premium paid would balance out by age 65 ($4,000 for 25 years, and $5,000 for 20 years both equal $100,000).
How Waiting Can Affect Trish's Cash Value, Death Benefit, and Insurability
Waiting would have a negative effect on several key areas. A whole life policy offers the benefit of tax-deferred accumulation of cash value. Generally speaking, the sooner Trish starts, the faster her cash value will grow over the long term. These cash values can be accessed through policy loans2 to help her meet financial needs. In addition, a whole life policy is eligible to earn dividends, if and when they are declared by the company. 3 Trish could use her dividends in a variety of beneficial ways, including purchasing additional insurance to enhance her total death benefit. Waiting would mean missing five years of potential dividends, as well as the opportunity to increase the benefit paid to her beneficiaries.
Waiting five years can also jeopardize Trish's insurability. She's insurable at age 40, but may be uninsurable due to a health condition at age 45. Perhaps the greatest risk in waiting is if she were to die in the next five years. In that case the cost would be the $250,000 death benefit her beneficiaries would not receive.
Purchasing this policy now may cost no more than waiting five years. In the future, however, the cash value and death benefit should be higher. Most importantly, insurance protection would begin immediately. So why would Trish want to risk waiting?
It's Never Too Early for You to Start Saving
Although today's responsibilities may take up most of your time and attention, it's important to consider what you want to accomplish in the future. Let time work to your advantage, beginning now. For help with identifying and accomplishing your financial goals, contact your New York Life agent today.
New York Life has a financial checklist and filing system that not only helps you organize what you have — it helps you identify what you may need down the road. It’s called the LifeFolio System: Your Lifetime Financial Organizer. At no charge to you, a New York Life agent — professionally trained and experienced — can help you get on the road to financial organization and also assist you in analyzing your needs and recommending appropriate solutions through insurance and financial products and concepts. Request a no obligation review with a New York Life agent today.
Note: The examples discussed herein are for informational and illustration purposes only. They're not intended to predict or guarantee the performance of any insurance or financial product.
1Six percent is for illustrative purposes only and is not intended to predict or guarantee the results of any security product.
2Outstanding policy loans accrue interest and decrease the policy's death benefit.
3Dividends are based on the policy's applicable dividend scale, which is neither guaranteed nor an estimate of future performance. Although dividends cannot be guaranteed, New York Life has paid annual dividends to policyholders for over 155 consecutive years.
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