Funding Your Investment Goals

Many of us start the year with the best intentions: to save more, and improve how we fund our investment goals. But following through on these goals can be tough. Rocky market conditions deter some and a harsh economy means others have more immediate financial worries to take care of.

The result is you may not be saving enough.  The Employee Benefit Research Institute recently reported that “more than half of workers (56 percent) report that the total value of their household’s savings and investments…is less than $25,000.”

There are tools to help: a Roth IRA offers great tax savings and automatic investment plans (AIP) offer a way to automate our contributions to our investment accounts.

Roth IRAs
If you are saving for retirement, a Roth IRA remains one of the best options. Although your annual contribution to a Roth IRA is not tax deductible, the earnings and withdrawals (after at least five years) won’t incur federal income tax. Depending on how much your account grows over time, a Roth IRA could provide a significant tax savings.

There are no age limits for investing in a Roth IRA. The advantage if you’re a young investor is that you’ll have more time for your account to appreciate, but there are potential benefits for older investors as well.  If you’re over 70 1/2, for example, you don’t need to take mandatory withdrawals (required minimum distributions, or RMDs) from a Roth IRA, so your savings can continue to grow tax free.

It’s not too late to contribute up to a Roth IRA. The IRS gives you until April 15, 2012 to make a contribution for the 2011 tax year.  There are income limits, but even if your income level eventually rises above the limit, once you’ve established a Roth IRA, that account remains tax-sheltered.

An Investment Plan
All good intentions aside, it’s hard to stay on track for our investment goals.  It helps to have a plan that prompts you to make on-going contributions.  An automatic investment plan (AIP) is a great way to force yourself to keep investing. When you sign up for an automatic investment plan (AIP), cash is automatically transferred from your bank account into your mutual fund investment every month.

AIPs keep you committed to a system, regardless of market direction. AIPs also prompt you to dollar cost average into your investments. Because you’re investing a certain amount on a regular basis, you’re able to buy more shares when the market and share prices are down, and fewer shares when NAVs are high.  

There are three important factors that affect your ability to fund your investment goals: how much you can contribute, how long you plan to be invested, and how much your portfolio returns.

Contribute Every Month
We looked back over the last 10 years to see how you’d have fared if you’d signed up for an automatic, monthly investment in the FundX Upgrader Fund (FUNDX). The past 10 years are considered one of the worst periods on record for investors and it includes one of the worst bear markets ever, but despite the time period, a regular investment in FUNDX paid off.

If you invested $250 in FUNDX every month from December 31, 2001 through December 31, 2011, your investment in FUNDX would have grown to $35,506. If you increased the amount you contributed to an AIP each month, you invested more over this 10 year time period.

If you wanted to contribute the annual maximum $5000 to a Roth IRA, for example, you’d need to invest $416 a month. If you invested $416 a month in FUNDX for the last 10 years, your investment grew to $59,082.

Higher Rates of Return Can Help
The second graph looks at what would happen if you invested $416 a month for the next 20 years, using four hypothetical annual returns: 4%, 6%, 8%, and 10%. Although your expected rate of return is not predictable, the chart shows that your returns can have a dramatic impact.

Commit to Investing
We can’t control future returns, but we can control how much we invest. Being consistent in our investments is crucial. Consider that a 40-year old that invests $416 in a Roth at the beginning of every month until age 50, and then increases that amount to the maximum of $500 for the next ten years, will accumulate $205,975 by age 60 if the fund grows at 6% per year. But if that individual was forced to suspend that monthly deferral for just four years from ages 45-48, the account would be worth just $162,505 at age 60 or more than $43,000 less.
 

Dollar Cost Averaging involves continuous investment in securities regardless of fluctuating price levels of such securities the investor should consider his/her financial ability to continue purchases through periods of low price levels. Automatic Investment Plans and Dollar Cost Averaging do not assure a profit and does not protect against loss in declining markets.
Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Funds nor any of its representatives may give legal or tax advice.