If you have been beefing up your financial education, then you know by now that there is always a risk of loss when investing in the stock market which could affect your financial freedom.
You start thinking to yourself...
"Why not sell out of stocks, mutual funds and bonds all together if they are too risky when I am in retirement and have basically no time horizon left for me to recoup any losses".
The answer is a complex one but can be summed up in one word.
INFLATION! That nasty little word that keeps the prices of everything going in one direction...
up.
Thanks to modern medicine, people's life expectancy is getting longer all the time.
It is not uncommon to live 20 years or more in retirement (65 to 85).
With that being the case, you need to have some stock exposure in your portfolio to keep up with inflation as history has shown us that over time, stocks outperform bonds.
You will need to have a small portion of your entire portfolio invested in stocks in addition to bonds if you intend to keep pace with inflation and not run out of money before your time runs out.
If this were to happen, it could surely dampen your financial freedom! If you are the kind of individual that routinely saves ten percent of your income for your eventual retirement, then you already know that you are going to be investing for the long haul and probably in mutual funds.
What I would like to show you now is the difference between investing in a tax deferred account like a 401(k) or an IRA versus choosing not to open up one of these tax advantaged vehicles but instead investing with after tax dollars.
Let's say that you start at age 20 putting away $5,000.
00 per year and you do this religiously until retirement at age 65.
That becomes 45 years of savings or $225,000.
00 saved ( 45 years times $5K per year).
Let's also assume that you are able to capture a modest 8% return for your efforts.
In the first case, you are funding your 401(k) and or your IRA.
Your $225,000.
00 grows to almost $2,000,000.
00 in a tax deferred account.
In the second case, this same $225,000.
00 grows to only $1,437,609.
00 in a taxable account.
You could have accumulated over 25% more just by your choice of account! Investing inside a tax deferred account is one of the best ways that you can invest your money to stay ahead of inflation.
Since the historical inflation rate has been about 3% per year, If you can receive about 8% per year for your investing efforts, you will easily be able to stay ahead of inflation, protect your purchasing power and secure your financial freedom!