Beginnings

Genesis is defined as an origin, creation or beginning.  Witnessing the birth of my two sons ranks as two of the most memorable experiences of my life.  To struggle, toil and grow during those nine months only to be born into this world as a new beginning is a miracle.  For any parent, it is truly an amazing experience to watch the beginning of a child’s life on earth.

Similarly, for every financial goal, there must be a beginning.  A great starting place in thinking about your goals is to create a financial plan.  Saving for retirement is a common goal investors face today as the primary savings tool has shifted from relying on company pension plans to 401(k) plans.  As seen below in figure 1, pension plans (defined benefit plans) have decreased in usage from 65% in 1978 to only 7% in 2011.  As a result, most companies have switched to offering defined contribution plans such as 401(k) plans to their employees.  This change has shifted the burden of saving for retirement from companies to individuals.

Figure 1: Retirement Plan Changes

Source: JP Morgan

The reality for most people today is that saving for retirement is a difficult endeavor.  Investors face a myriad of questions.  How much do I save each month?  How should I allocate my savings?  Which investment choices should I choose?  What is my tolerance for risk?  How often do I review and rebalance my plan?

Vanguard has put together a great example of a basic framework for an investment plan in the chart below.  This hypothetical example begins with a goal of saving $1,000,000 for retirement in today’s dollars adjusted for inflation.  Some of the basic elements are outlined such as time horizon, risk tolerance, asset allocation target, savings level, and savings targets. 

Figure 2: Example of a basic framework for an investment plan

Source: Vanguard

It’s easy to get overwhelmed with all the decisions, but the most important decision to make is to start saving as early as possible and remain consistent in your savings.  Figure 3 shows the power of starting an investment plan early.  Chris (green line) invests a total of $200,000, only $50,000 more than Bill (gray line), but ends up with about $600,000 more at age 65.  

Figure 3: Benefits of Saving Early

Source: JP Morgan

All financial and investment plans evolve over time so it’s important to regularly monitor your plan.  This marks the beginning of the Genesis Blog.  I plan to write mostly about investing, personal finance, the markets and the economy.  I hope to educate and sometimes entertain my readers.  Here’s to a new beginning!