Atlantic Capital Management

Atlantic Capital Management (83)

Wednesday, 16 September 2015 00:00

Saving Early & Letting Time Work for You

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The earlier you start pursuing financial goals, the better your outcome may be.

 

 As a young investor, you have a powerful ally on your side: time. When you start saving and investing for retirement in your twenties or thirties, you can put it to work for you. 

The effect of compounding is huge. Most people underestimate it, so it is worth illustrating. We will use reasonable annual return rates to do so – we will assume an investor can earn an average of 6-7% a year on his or her portfolio.   

What if you invest $500 a month at age 25 & realize a 6% annual return? Under those hypothetical conditions, you would become a millionaire at age 65. To be precise, you would need to invest $499.64 per month starting at age 25 and keep it up for 40 years.1

At age 25, saving and investing $500 each month may seem like a luxury. It is closer to a necessity. In 2055, having $1 million or more saved up for retirement may be essential. Over 40 years, inflation will make $1 million worth less than it is today. The good news is that if your investments return more than 6% in a year, you could reach and surpass that $1 million mark faster.

It need not take 40 years for compounding to make a difference for you. Shortening the timeline of this hypothetical example, after ten years of saving and investing $500 a month at a 6% annual return, you would end up with $81,939.67 compared to the $60,000 you would realize from merely saving the cash sans investment.2

The earlier you start, the greater the compounding potential. If you start saving and investing for retirement in your twenties, you gain a definite compounding advantage over someone who waits to save and invest until his or her thirties. Another comparison bears this out.

Take two investors, both contributing $200 per month into their retirement accounts. One does this for 40 years starting at age 25. The other does this for 30 years starting at age 35. Again, we assume a 6% annual return for each account. The investor who starts at 25 winds up with $402,492 at age 65, while the one who started at 35 amasses just $203,118 over 30 years.3

Just ten years of difference in the start time, yet the money almost doubles by age 65. This is a compelling argument for starting to save for retirement (and other goals) as early as possible.

Even if you start early & then stop, you may out-save those who begin later. What if you contribute $5,000 to a retirement account yearly starting at age 25 and then stop at age 35 – no new money going into the account for the next 30 years? That is hardly ideal, yet should it happen, you still might come out ahead of someone who begins saving for retirement later.

As J.P. Morgan Asset Management research notes, an investor who consistently directs $5,000 a year in a retirement account from age 25-35 with a 7% continued annual return ends up with $602,070 at age 65 even if contributions cease after age 35. The really startling part: that investor actually amasses more retirement savings than an investor who steadily contributes $5,000 a year from age 35-65 at the same rate of return – he or she realizes just $540,741.1  

This is all worth noting, because many millennials seem wary of investing. This spring, a Bankrate MoneyPulse survey indicated that only 26% of Americans under age 30 are investing in equities. In July 2014, another Bankrate survey found that Americans 18-29 favored cash investments (i.e., bank accounts and bank-based investment vehicles) above all others. Student loans and child-rearing costs reduce investing potential for many millennials, but as these survey results hint, some are cynical about the whole investment process.4,5

If you were born in the late eighties to early nineties, you are old enough to remember the dot-com bust of the early 2000s and the crushing bear market of 2007-09. This may have given you an early negative view of equities; these events are clear examples of how risk plays a part in this type of investment.

The reality, though, is that most people planning for retirement need to build wealth in a way that outpaces inflation. Equity investing offers a route toward this objective, one many investors have successfully taken. Directing your savings into equities can be helpful, because broadly speaking, you will not retire merely on the contributions you make to your retirement accounts. You will retire on the compounded earnings those invested assets achieve.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 - businessinsider.com/amazing-power-of-compound-interest-2014-7 [7/8/14]

2 - quickenloans.com/blog/investing-101-how-to-get-started [8/27/15]

3 - businessinsider.com/saving-at-25-vs-saving-at-35-2014-3 [3/25/14]

4 - cnbc.com/2015/08/24/more-millennials-say-no-to-stocks-and-advisors-adapt.html [8/24/15]

5 - bankrate.com/finance/consumer-index/financial-security-charts-0714.aspx [7/21/14]

Thursday, 10 September 2015 00:00

Teaching Your Heirs to Value Your Wealth

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Values can help determine goals & a clear purpose.

Some millionaires are reluctant to talk to their kids about family wealth. Perhaps they are afraid what their heirs may do with it.

In a 2015 CNBC Millionaire Survey, 44% of families having at least $1 million in investable assets said that they had not yet told their children about their future inheritance. Another 27% said they had refrained from mentioning it until their children were 30 or older.1

It can be awkward to talk about such matters, but these parents likely postponed discussing this topic for another reason: they wanted their kids to grow up with a strong work ethic instead of a “wealth ethic.” 

If a child comes from money and grows up knowing he or she can expect a sizable inheritance, that child may look at family wealth like water from a free-flowing spigot with no drought in sight. It may be relied upon if nothing works out; it may be tapped to further whims born of boredom. The perception that family wealth is a fallback rather than a responsibility can contribute to the erosion of family assets. Factor in a parental reluctance to say “no” often enough, throw in an addiction or a penchant for racking up debt, and the stage is set for wealth to dissipate.

How might a family plan to prevent this? It starts with values. From those values, goals, and purpose may be defined. 

Create a family mission statement. To truly share in the commitment to sustaining family wealth, you and your heirs can create a family mission statement, preferably with the input or guidance of a financial services professional or estate planning attorney. Introducing the idea of a mission statement to the next generation may seem pretentious, but it is actually a good way to encourage heirs to think about the value of the wealth their family has amassed, and their role in its destiny. 

This mission statement can be as brief or as extensive as you wish. It should articulate certain shared viewpoints. What values matter most to your family? What is the purpose of your family’s wealth? How do you and your heirs envision the next decade or the next generation of the family business? What would you and your heirs like to accomplish, either together or individually? How do you want to be remembered? These questions (and others) may seem philosophical rather than financial, but they can actually drive the decisions made to sustain and enhance family wealth.

Feel no shame in exerting some control. A significant percentage of families seek to define a purpose for transferred wealth. In CNBC’s survey, 32% of parents aged 55 or younger said they were going to specify what their heirs could use their inheritances for, and that was also true for 15% of parents aged 55-69 and 9% of parents aged 70 or older.1

You may want to distribute inherited wealth in phases. A trust provides a great mechanism to do so; a certain percentage of trust principal can be conveyed at age X and then the rest of it Y years later, as carefully stated in the trust language.

This is a way to avoid a classic mistake: giving your heirs too much money at once. In fact, a 2015 Merrill Lynch Private Banking & Investment Group report notes that 46% of high net worth parents share that very concern.2 

Just how much is too much? Answers vary per family, of course. In the aforementioned Merrill Lynch survey, 46% of families said that they wanted to avoid handing down the kind of money that would dissuade their heirs from realizing their full potential in their lives and careers.2

By involving your kids in the discussion of where the family wealth will go when you are gone, you encourage their intellectual and emotional investment in its future. Pair values, defined goals, and clear purpose with financial literacy and input from a financial or legal professional, and you will take a confident step toward making family wealth last longer. 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

Citations.

1 - cnbc.com/2015/07/22/wealthy-parents-fret-over-inheritance-talk-with-kids.html [7/22/15]

2 - bankrate.com/finance/estate-planning/critical-questions-before-leaving-an-inheritance-1.aspx [8/6/15]

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