Financial Fitness:Planning for the long run

Congratulations to Harriette Thompson for setting the world record for the fastest marathon ever by a woman 90 years or older, and the oldest to complete the race at 92 years young, according to media reports. Her completion of the Rock â??nâ?? Roll San Diego Marathon in May of 2015 is an inspiration. This reminded me that I need to get serious about my training for the 2015 Marine Corps Marathon, nicknamed â??Marathon of the Monumentsâ? this October.

The USATF-certified 26.2 mile course begins near Arlington National Cemetery, continues past the Kennedy Center, the Lincoln Memorial, the Jefferson Memorial, the Martin Luther King, Jr. National Memorial, the National Mall Museums, the Washington Monument, and will finish at the Marine Corps War Memorial. If I follow my coachâ??s training plan, making necessary adjustments at important milestones, I will perform at my best level on this monumental race day.

At this point there are approximately four months, 20 weeks, or 140 days to train which sounds like a long time. However, there is always the option of waiting two months to begin training, but at what risk? Most would agree that training over four months would likely produce better results than just two months. This allows more time for cross training and flexibility work in order to prevent injuries and improve technique on the way to the starting line.

Similar concepts are true in financial planning. Consider the scenario of investing over a 40 year time horizon. Assume that your risk tolerance would allow for an 8 percent compounding interest rate and that you do not foresee a need to use the funds until retirement. For simplicity letâ??s say that we are investing $100 per month or $1,200 per year.

Runner one begins investing at age 20, on day one, and year one, and continues to add $100 monthly principle for the 40 years at the assumed compounding 8 percent interest rate. What will the investment produce? If compounded monthly, this could produce a future amount of $351,528.12, having invested only $48,000 of principle.

Runner two begins investing at the end of each year (not monthly) at $1,200 per year for 40 years at the assumed 8 percent annual compounding interest rate. This runner also began saving at age 20 but with annual and not monthly deposits, and compounding at the assumed 8 percent annual interest rate over 40 years. The future amount of the investment could be $310,867.82. The monthly vs. annual compounding effect is significant as one can see. Runner one at $351,528.12 less the $310,867.82 of runner two would be a $40,660.30 difference for making monthly vs annual compounding principle deposits.

Finally, If runner three waited to begin saving until the final 20 years with annual deposits of $1,200, and at the assumed 8 percent annual (not monthly) compounding interest rate , he would only accumulate $54,914.36. This is a big difference from the results of runner one and runner two who began saving much earlier.

Have you said to yourself â??When would I like to retireâ?? Could getting your plan started early make a difference? Set a goal and connect with a financial advisor if you would like coaching along the way. Get started early to put your hard earned money to work for you. Like running a marathon, preparing for retirement takes time and discipline for most of us. Some, like Harriette, may need to plan for a little longer.

Jim R. Charapich is a LPL financial advisor with Brown Harris Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This content contains hypothetical examples and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. Securities Offered Through LPL Financial, Member FINRA/SIPC www.finra.org , www.sipc.org
You may reach him at jim@brownharrisinc.com