Mixed Performance as Turkey Stumbles

Weekly Update - August 13th 2018

Posted by: Ryan Kimes,  CFP®

Stocks ended the week in mixed territory as trouble with Turkey’s currency affected U.S. equity performance on Friday, August 10.  For the week, the S&P lost 0.25%, the Dow declined 0.59%, and the NASDAQ increased 0.35%.  International stocks in the MSCI EAFE stumbled, giving back 1.57%.  

Although last week brought relatively few economic updates, we did learn that the labor market continues to improve and consumer prices are on the rise.  While this news may have affected market performance, the challenges facing Turkey’s economy had an outsize impact on global stocks.  

What happened to the Turkish lira?
The Turkish lira dropped 14% to 6.46 per dollar, the weakest on record with the largest drop in more than 17 years. The lira ended the week at a record low against the U.S. dollar.  Tension between the U.S. and Turkey played a part in the decline as President Trump tweeted plans to double tariffs on Turkish steel and aluminum imports. This potential tariff hike followed a stalled conversation between the two countries concerning an imprisoned U.S. pastor who Turkey believes supported a 2016 attempted coup.  

How did investors react?
The resulting drop in the lira’s value concerned investors and led to losses in markets worldwide. Friday, the S&P 500 marked its largest daily decline since June after getting close to a new record high.  

Why do investors care?
The lira’s drop is another sign that emerging markets are experiencing challenges in their economies.  Some investors worry that Turkey’s economic crisis could spread to other countries or affect interest in other emerging markets.  

Should you be concerned?
Probably not for now. U.S. companies don’t have a tremendous amount of exposure to Turkish markets.  

We know that global dynamics can be complex and understanding their specific effects on your financial life may seem challenging. If you have any questions, contact us any time. 

ECONOMIC CALENDAR
Tuesday: Import and Export Prices
Wednesday: Retail Sales, Industrial Production, Housing Market Index
Thursday: Housing Starts, Jobless Claims
Friday: Consumer Sentiment
 

 Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on  Morningstar.com  and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Stocks Up as Data Comes In

Posted by: Ryan Kimes, CFP®

Week in Review: Data as of 8/6/2018

Domestic markets ended last week in positive territory, as the S&P gained 0.76%, the Dow was up 0.05%, and the NASDAQ increased 0.96%.  This performance marked the 5th week in a row that the S&P 500 and Dow posted gains.  Meanwhile, international stocks in the MSCI EAFE stumbled, losing 1.47% for the week.  

Once again, trade and corporate earnings were in the news last week. We learned that the U.S. is considering increasing tariffs on $200 billion of Chinese imports. In response, China announced their own tariffs ranging from 5%–25% on $60 billion of U.S. products.  

Corporate earnings season also continued, and so far, more than 78% of S&P 500 companies have beaten estimates.  If the trend holds, the 2nd quarter will likely average more than 20% growth in earnings per share. Companies have also detailed positive perspectives for the rest of 2018, showing that this strong corporate performance should continue.  

Of course, last week’s trade and earnings weren’t the only topics on investors’ minds. We also received a number of data reports that shaped our understanding of the economy’s health. 

 All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on  Morningstar.com  and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly

All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly

Key Findings from Last Week

•    Consumers are earning and spending more. 
The latest data for personal consumption and personal income revealed both measures increased by 0.4% in June. In addition, the report included revised data from 2013–2017, which indicated that people earned $1.05 trillion more during that time period than initially thought.  

•    Tariff concerns are affecting manufacturing. 
The manufacturing sector continues to expand at a faster rate than in 2017, but the pace of growth slowed more than anticipated in July. Respondents to the ISM Manufacturing Index survey shared concerns about tariffs, steel and aluminum disruptions, and transportation challenges.   

•    The Federal Reserve is on track for a September rate hike.
The Fed didn’t raise rates this month, but projections show a 93.6% chance that it will do so in September.  The latest jobs report detailed steady wage increases, which helped ease Fed concerns about inflation.  

This week is relatively light on economic data, but we will continue to analyze last week’s reports and the remaining corporate earnings releases. If you have any questions about where the economy is today or what may lie ahead, we’re here to talk. 

 

[1] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
[1] https://www.cnbc.com/2018/08/03/us-stocks-point-to-lower-open-as-investors-await-jobs-report.html
[1] https://www.msci.com/end-of-day-data-search
[1] https://www.cnbc.com/2018/08/03/us-stocks-point-to-lower-open-as-investors-await-jobs-report.html
[1] https://www.reuters.com/article/us-usa-stocks/wall-street-gains-as-upbeat-earnings-trump-trade-jitters-idUSKBN1KO1IH
[1] https://www.barrons.com/articles/after-the-bell-stocks-steamroll-tariff-and-job-worries-to-end-higher-1533330996
[1] https://www.ftportfolios.com/Commentary/EconomicResearch/2018/7/31/personal-income-and-personal-consumption-both-rose-0.4percent-in-june
[1] https://www.bloomberg.com/news/articles/2018-08-01/u-s-manufacturing-cools-as-orders-gauge-falls-to-one-year-low
[1] https://www.cnbc.com/2018/08/03/us-stocks-point-to-lower-open-as-investors-await-jobs-report.html
[1] http://wsj-us.econoday.com/byshoweventfull.asp?fid=485658&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top

When Do You Need to Change Your Life Insurance Policy?

Posted by: Ryan Kimes, CFP®

When you decide to get life insurance, you’re essentially looking beyond yourself. You understand that life insurance is necessary to protect your family after you’re gone.

Sometimes, however, circumstances change, and you have to make changes to your policy to ensure your goals are achieved.

 There are numerous forms of life insurance policies, understanding which is the best for you is critical for you and your family's security and financial well-being. Sentinel Wealth Management does not sell insurance products for a commission, but includes objective insurance recommendations and advice to our clients.. 

There are numerous forms of life insurance policies, understanding which is the best for you is critical for you and your family's security and financial well-being. Sentinel Wealth Management does not sell insurance products for a commission, but includes objective insurance recommendations and advice to our clients.. 

Here are several matters to consider periodically if you have a long-standing policy:

1.    Paying your mortgage

Ideally, if you’re approaching retirement or have already retired, you should have paid off your home mortgage. Traditionally, lower retirement incomes can make mortgage payments difficult. However, mortgage and other debt is becoming increasingly commonplace among older Americans.  In fact, research shows debt levels among retirees over the age of 75 have risen by nearly 20% between 2007 and 2016. Mortgage debt has nearly doubled in the past 20 years. 

Financial analysts say eliminating mortgages should be a top priority before retiring.  Without a mortgage you may decide to lower your policy’s face amount—and your premiums—since you won’t need the higher policy proceeds. The additional income—and lower monthly expenses—will make for more manageable retirement budgets. 

2.    Becoming guardians of grandchildren

Sometimes tragedy or misfortune requires you to become your grandchildren’s guardians. More than 6 million children in the United States live with at least one grandparent, which is 9% of the population of children in the country. That’s 56% of children who are not living with their parents.  Reviewing your policy coverage, which may include adding your new dependents, may help secure your grandchildren’s future.

3.    Divorcing your spouse 

Although today’s retirees live longer, the divorce rate among older Americans is climbing. Called “gray divorces,” the rate among people 65 and older has nearly tripled since 1990.  Changes in your marital status may require you to change your beneficiary designations or reduce your coverage. Former spouses generally don’t need the higher protections under joint policies.

4.    Marrying later in life

On the other side of the relationship fence are first-time marriages or remarriages. When you enter into a new relationship, you should revisit your policies (or buy new ones) to ensure your loved ones are insured. Most policies allow you to name primary and contingent beneficiaries. 

If you’re ready to make changes to your policies, give us a call. We’re ready to help you make the most of your opportunities in the most biased way possible.
 

maxresdefault-copy-19052017082655-1000x0.jpg

Jobs Push Stocks Up

Weekly Update - July 9, 2018

Posted by: Ryan Kimes, CFP®

Domestic stocks only traded for 4 days last week, due to the Independence Day holiday. In that time, all 3 major domestic indexes posted positive results for the week. The S&P 500 added 1.52%, the Dow gained 0.76%, and the NASDAQ increased 2.37%.  International stocks in the MSCI EAFE were up as well by 0.56%.  

Once again, trade and tariffs were a major topic on many people’s minds. On Friday, July 6, the U.S. and China placed $34 billion of duties on each other’s imports.  However, instead of focusing on the trade-war escalation, another topic captured many investors’ attention: the latest jobs report.
 

 Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on  Morningstar.com  and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

What did we learn about the labor market?

This month’s report about the employment situation provided several indications that the economy continues to be healthy and growing.

1. The economy added more jobs than expected.

Economists predicted approximately 195,000 new jobs in June. Instead, the report showed that the economy added 213,000 new positions.[i] This positive performance indicates the labor market may be somewhat looser than people originally thought. As a result, the economy may have more ability to continue growing without inflation becoming a bigger concern.[ii]

2. More people tried to enter the labor market.

Unemployment rose from 3.8% to 4% in June. On the surface, this result may seem negative. In reality, the increase comes from people who were sitting on the sidelines deciding to look for work once again. This choice indicates they feel more confident in their potential to find jobs.[iii]

3. Wage growth continued at a moderate pace.

The latest data revealed wage growth at a 2.7% annual pace, which was slightly below projections. Economists aren’t certain why wages are growing at such a tepid rate, considering the labor market’s strength.[iv] However, with a record number of open jobs, wage growth should increase later this year. In addition, June’s pace should help calm concerns about the economy growing too quickly.[iv] 

One detail that June’s employment report didn’t show was any meaningful, negative impacts from tariffs. If the trade disputes continue, however, industries such as manufacturing and construction could suffer. For now, the economy is starting the 3rd quarter on relatively strong footing—after a 2nd quarter that experts say could have experienced economic growth as high as 5%.[v]

We will continue to monitor ongoing trade developments for any lasting effects on the economy or our clients’ financial lives. As always, if you have any questions, we’re here to talk.

[i] https://www.cnbc.com/2018/07/06/us-stock-futures-tariff-turmoil-and-jobs-report-in-focus.html
[ii] https://www.bloomberg.com/news/articles/2018-07-06/u-s-jobs-report-shows-room-to-run-as-trade-war-threatens-gains
[iii] http://wsj-us.econoday.com/byshoweventfull.asp?fid=485657&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
[iv]  https://www.reuters.com/article/us-usa-economy/u-s-job-growth-underscores-economys-strength-tariffs-a-threat-idUSKBN1JW0EI

[v]https://www.reuters.com/article/us-usa-economy/u-s-job-growth-underscores-economys-strength-tariffs-a-threat-idUSKBN1JW0EI

 

Roth vs Traditional IRAs - Which is Best for You?

Author: Ryan Kimes, CFP®

“IRA” is a commonly used acronym for “Individual Retirement Account”. These types of legal accounts are given special tax treatment to incentive individuals to save for retirement. The type of IRA you invest in can significantly impact your long-term savings, so it’s crucial for investors to understand the differences and advantages of these accounts.

Limited Annual Contributions

Many individuals struggle to take the initiative when opening a retirement account, a mistake that can often lead to missed tax-year contribution opportunities. Both Roth and Traditional IRA contributions are limited to $5,500 per year, or $6,500 if age 50 or older. This means that you are limited to the amount of principal that can be invested in the account each year, with the deadline for the previous year being April 15th, tax day. For example, if in 2018 you contribute $250 per month in 2018 ($3,000 by December 31st, 2018), you will have until April 15th, 2019 to contribute the remaining $2,500 for the 2018 tax-year. If the contribution is not made by April 15th, 2019 (tax-day), the $2,500 of remaining contributions will be missed and cannot be made up for in future years. Why does this matter? Because the long-term impact of these account’s tax-advantaged provisions on your net investment are substantial, and income phase-outs can further limit future contribution opportunities.

Tax Advantages

The tax-savings characteristics of Roth and Traditional IRAs differ significantly, so selecting the proper account contribution should be a priority for investors. To start, Traditional IRAs are considered pre-tax contributions. This means any amount invested in the account will not be taxed, providing an end-of-year tax credit to the individual. For example, if an individual who is making $50,000 per year, within a 20% hypothetical tax bracket, contributes $5,000 in a given tax-year, he will only be taxed on $45,000 of income that year. Why is this important? Instead of being taxed 20% on the $5,000 of income invested, netting $4,000 in after-tax dollars, the initial investment in the Traditional IRA will be the entire $5,000 of pre-tax dollars. The long-term compounding on the initial investment will immediately be at an advantage within the traditional IRA. Further, investment capital gains and investment income will be deferred until withdrawal from the account, rather than being taxed each year as with a regular taxable investment account. With taxation being deferred annually, the dividend income and capital gains that would have been lost to taxation remains within the account, continually compounding until withdrawal. However, when the retiree begins to make withdrawals from his Traditional IRA, the full amount of the withdrawal will be subject to income taxes.

Tax Deferred vs Non-Tax-Deferred

Alternatively, Roth IRA funds are deposited after taxes are taken out of the individual’s annual income. Instead of providing tax deferral for dividend income and capital gains, as with Traditional IRAs, earnings within Roth IRAs are tax-free when withdrawn in a qualified manner. Qualified withdrawals include: earnings withdrawals after age 59.5, first time home-purchases (lifetime maximum of $10,000), post-secondary education expenses, certain medical expenses, IRS tax-levies, and health insurance premiums in certain situations. For all qualified withdrawals, the Roth IRA must have been established longer than five years prior to withdrawal.

Roth IRA vs Taxable Account

Other Withdrawal Rules

Another difference to consider when selecting between Traditional and Roth IRA contributions is when the savings must be withdrawn. It is important to remember that a 10% early withdrawal penalty may be imposed by the IRS for Traditional IRA withdrawals before age 59.5. Due to this Traditional IRA early-withdrawal penalty, Roth IRAs are better for those who wish to have access to the funds prior to retirement. So long as the account has been open for five years, contributions to Roth IRAs may be withdrawn without penalty. Again, this no-penalty withdrawal is applied to contributions only, not earnings. Withdrawals of earnings may be penalized if they are not qualified. As previously discussed, for Roth IRA earnings to be withdrawn tax-free before retirement, certain conditions must be met

With Traditional IRAs, you must begin withdrawing what are called required minimum distributions (RMDs), by age 70.5 years old, whether you need the withdrawals or not. This requirement is in place so deferred taxes within Traditional IRAs are eventually realized by the Federal Government. Otherwise, the pre-taxed dollars within Traditional IRAs could remain in the account and potentially grow indefinitely without taxation, should the funds never be used. 

However, with Roth IRAs, withdrawals are never required unless in the case of an inherited Roth IRA. If you do not need income from your Roth IRA, you may allow it to continue growing tax-free through the remainder of your life, making them excellent wealth-transfer accounts.

Income Phaseouts

Roth IRA: Single tax filers may make contributions to Roth IRAs with modified adjusted gross income less than $135,000 (contribution maximum begins phaseout at $120,000). Married individuals filing jointly have a phaseout range of $189,000-$199,000.

If you anticipate a higher income in coming years, it is crucial to take advantage of eligible contribution years. They will likely be limited.

Traditional IRA: All tax-filers may contribute to a Traditional IRA, but tax deductibility rules are based on an individual's income and access to employer retirement plans.

Which Is Right For You?

To determine the best long-term choice for your contribution, you must consider whether your tax-rate for the current year will be greater today or tomorrow. Of course, you cannot predict what the federal income or state tax rates will be in 30 years, but you may anticipate more or less income on any given tax-year.

Traditional vs Roth

Generally speaking, you want to realize taxation by contributing to a Roth IRA in years where your modified adjusted gross income will be less than in future years. Though it is common for individuals to anticipate making less in retirement, lost tax deductions, credits, and increased passive and social security income, often places retirees at a higher adjusted gross income in retirement. In this scenario, a Roth IRA contribution would be the superior choice over a Traditional IRA contribution.

Passive vs Active Management: Efficiency Over Skill

Author: Ryan Kimes, CFP®

Alpha is a statistical financial metric that measures the excess performance of an investment or portfolio relative to a benchmark such as the S&P 500. Although it is possible for investment managers to outperform relative benchmarks (positive alpha), investment underperformance (negative alpha) tends to be more probable after fees and trading expenses are taken into account. Considering empirical studies by Harbon, Roberts, and Rowley 2016, consistent net outperformance is rare, not necessarily due to lack of manager skill, but as a consequence of added expenses born by active trading,

In fact, according to Vanguard calculations using data from Morningstar Inc., over the past 20 years, less than 25% of actively managed U.S equity mutual funds outperformed their relative benchmarks. Consistent underperformance of actively managed funds were found across all asset classes across numerous countries, market segments, and time periods. Studies that conclude the scarcity of persistently outperforming, professionally managed funds include: Sharpe 1966, Jensen 1968, Carhart 1997 (risk-adjusted), Fama and French 2010, and Harbon, Roberts, and Rowley 2016.

Why does this occur? The poor performance of these funds can be understood in the concept of the zero-sum game found in financial markets. According to Sharpe 1991, the zero-sum game explains that within capital markets, the holdings and transactions of all participants aggregates into the market as a whole. For every winner, there is a loser. For every loser, there is a winner. Essentially, for every dollar of outperformance earned by a manager or individual, there is an equally lost dollar to underperformance. Therefore, it is reasonable to suggest that the probability of any given transaction leading to outperformance is 50%. This outperformance probability is considered before expenses and taxes are ever accounted for.

In reality, investors must pay costs associated with participating in the market. These include management expenses, administrative costs, broker/dealer bid-ask spreads, commissions, and of course, taxes. These cost variables will have a significant reduction to an investor’s net return over the long-term. Consequently, the potential for an investor’s outperformance in this zero-sum game becomes increasingly improbable, even with professional active management.

Further, the average return of a relative asset classes’ benchmark (such as the S&P 500) does not equate to the average return realized by an investor investing in that asset class or fund. Undisciplined investors are influenced by emotional decisions when it comes to initial investment timing and tolerance to return variability. Consequently, investors spend too much time and cost succumbing to internal biases that reduce the amount of time their investment is invested, increasing transaction costs, taxes, and introducing the risk of detrimental investment timing.

Market Participant Returns After Adjusting For Costs

 Vanguard

Vanguard

As investors focus too heavily on security or fund selection (bottom-up investing), they make poor investment decisions that hinder the realized return of their investments. Consider that a mutual fund’s exceptional performance would likely attract additional investors, consequently increasing the demand of the underlying securities within that actively managed mutual fund’s portfolio. This increased demand may inflate the value of the underlying assets, potentially making the security overvalued, thus reducing the probability of the fund’s future outperformance. Remember, past performance is not indicative of future results. The figure below illustrates this concept by measuring the difference (green) in average returns of investors (light blue) in various mutual fund classes to the actual returns of those mutual funds (blue).

Investor returns versus fund returns: Ten years ended December 31, 2015

 Vanguard

Vanguard

So what should investors do? Rather than focus on fund or security selection, investors should place a greater emphasis on asset allocation. Also known as “top-down” investing, asset allocation begins with analyzing a client’s financial goals and constraints, then creating a mix of assets (such as stocks and bonds) that best suits the client’s needs. Rather than buying funds with the most attractive returns, an investor focused on asset allocation would place a greater emphasis on maintaining a targeted mix of stocks to bonds, regardless of the characteristics of the underlying securities’ firm. As any individual stock or bond increases and decreases in value, its overall percentage weight within the portfolio will change. Periodically, trades are then placed to readjust, or rebalance, the investments within the portfolio to their original percentage weights. This is done to maintain the volatility-to-return characteristics of the portfolio, rather than actively trade the holdings to produce excess return relative to the stock or bond benchmark. Here, the investor realizes value in maintaining a portfolio that will have an acceptable level of variability and return expectations, while also eliminating as much for-certain expenses as possible.

The Mixture of Assets Defines the Spectrum of Returns

 Vanguard

Vanguard

Security market pricing is highly efficient, meaning excess return from underpriced securities is becoming increasingly improbable. With that said, it is often in the best interest of investors to work with advisors that focus on efficient asset allocation, rather than costly active management. Evidently, logical investment advisors should recommend portfolios that shy-away from for-certain expense ratios or active advisory fees in exchange low-cost asset-exposure alternatives.

When To Start Saving for Retirement

Author: Ryan Kimes, CFP®

Saving for retirement is one of the focal points of comprehensive financial planning, yet it is also one of the most uncomfortable subjects for individuals to discuss when meeting with an advisor. Frequent one-liner excuses from generation X and Y clients include, “I’m too young to be thinking about retirement”, or, “I don’t make enough money to be saving right now”. Sure, anyone can relate to these points, but one of the greatest values in financial planning is understanding the time value of money, and the relationship between compounding interest and intervals of time.

Let’s jump into some technical calculations for just a moment. When calculating the future value of an investment, we perform a calculation using the following formula:

Here, C represents a cash flow (our investment), r is the rate of return (or internal rate of return), and n is the number of periods of time. With time (n) being the exponential variable, the future value of the cash flow will have the greatest impact from a change in the number of periods invested (length of time invested). An example of this concept is illustrated below on an investment of $1.

*Source: The Vanguard Group, Inc. 2016

Why does this occur? Because of compounding interest relative to time. Compounding interest is interest growing on interest. Given more intervals of time, this interest will have time to compound on itself and produce additional compounding interest as years pass (^n=intervals of time), exponentially increasing the future value of our investment (C = cash flow).

With working Americans purchasing about $1,100 worth of coffee per year, according to a study by Acorns Money Matters, it’s pretty difficult to say the average person does not have the means to save even $50 per month. Remember, the goal of this article is to articulate the value of time and its impact on your investments, regardless of the amount saved. Let’s take this concept and calculate time’s true value given various assumptions.

Assumes 8% internal rate of return; compounded monthly

The current annual contribution limits for traditional and Roth IRA’s are $5,500 per year ($6,500 for ages 50+). This equates to about $458.33, but for the sake of simplicity we will round our savings to $450 per month. The above table applies the previously discussed future value equation to our cash flows to calculate the future value of our monthly investments, given an 8% annual growth rate.

Using this example, if a 37 year old individual saved $450 per month for retirement (at full-retirement-age of 67), for 30 years, and earned an annual rate of return of 8%, they would have a portfolio value of $675,133. Now, had the same individual started at 27, saving for an additional 10 years, they would have a portfolio value of $1,581,427. That’s a difference of $852,294 in compounding interest alone ($1,581,427- $675,1533 - [$450 per month x 12 months x 10 additional years]) = $852,294. The additional years of compounding interest on top of compounding interest allows the portfolio to grow exponentially greater than the 30-year savings plan, purely thanks to the time value of money. Do you still think it’s still too early to be thinking about retirement? What if the additional $852,294 in growth was grown tax-free through a Roth IRA? Now that’s a reason to start planning.

Source: The Vanguard Group, Inc. 2016