What Is Wealth Accumulation?

By Peter A. Racen, CLU®, ChFC®, CASL®, AEP®, CFP®      
Chief Executive Officer
Racen Wealth Management

It sounds pretty straightforward, but wealth accumulation can take a lot of different forms. It can even mean different things depending on what stage of life you’re in when you start saving.

But here’s our attempt at defining it: Wealth accumulation is accumulating assets over time and investing those assets in a way that meets your personal goals and objectives.

How should I define my goals and objectives?

Well, we’re glad you asked. Again, when you’re looking at what you want to accomplish with your financial plan, it’s important to consider what stage of your life you’re in at the start of the plan. This will help you set a realistic expectation, while also giving you insight into whether you should be more aggressive or conservative with your investment strategy.

For instance, if you’re a new set of parents that are looking to start investing to put your child through college, that longer accumulation period lends itself better to a more aggressive strategy. There’s less need to worry about the daily ups and downs of the market.

On the other hand, if your investment window is in a narrower timeframe, a more conservative approach could be better. Being more conservative will help you avoid some of the erratic swings in the market.

A 65-year investment

Here’s a quick story that will help give some real-world examples of how a steady wealth accumulation strategy can pay dividends.

Say a client walks into our office and says they would like to start a portfolio for their new grandson, but they don’t want him to have access to it until he’s 65. To kick things off, they put aside $15,000.

Before we give them a strategy, we would crunch the numbers.

After doing some analysis, we found that if we went back 65 years and made a $15,000 hypothetical investment (assuming tax deferred growth, and the capital gains and dividends were reinvested) it would’ve grown into nearly $37 million.*

And one of the key reasons behind that eye-popping sum: the compound curve.


Compound curve

The compound curve kind of looks like a hockey stick. Long and flat at the start, but with a nice upward curve towards the end.

The reason it does that is because over time, as you reinvest your capital gains and dividends, you’re buying more shares in that investment.

Buying more shares with your capital gains and dividends is key because over time it can accelerate the growth of your portfolio overtime.

Chart

The Rule of 72

And it’s important to start early. If you wait until after your 20s and 30s, you’ve essentially missed out on 2-3 “doubling periods” through the Rule of 72. This rule is a quick and easy formula to calculate how fast your money will double.

Here’s an example:
If you get a 10% rate of return, divide 10 by 72. That’ll show that your money will double every 7 years.

If you get a 12% rate of return, your money will double closer to every 6 years.

How a trusted advisor can help

With the long-term nature of wealth accumulation strategies, it can be easy to set it on the back burner and stop thinking about it. There are also risks to consider when investing. That’s where a financial advisor can help. They’re trained to review your strategy, optimize your investments, and create a financial plan designed to meet your financial goals.

*Examples are for illustrative purposes only and not indicative of any particular investment. All investments carry some level of risk including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against a loss. The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional.

Peter Racen, CLU®, ChFC®, CASL®, CFP®, AEP®
Wealth Management Advisor


Racen Wealth Management

 

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