Question

• Now that we understand the concept of the "time value of money," how do you plan to apply these principles to prepare for retirement?
• Please address issues such as:
  • Amount of time.
  • Interest (growth) rates.
  • Risk (generally, taking more risk results in a higher rate of return) tolerance.

Answer 1

Amount of time:

Retirement is a pretty long time in the future which gives money ample time to grow. It is wise to start investing as soon as possible because the effects of compounding show their true significance over long periods. Now, the best thing to do is to save a little every month. A little bit of money invested every month in a decent interest earning investment for a long period can grow to become a really handsome amount, thanks to compounding.

Interest rates and Risk

Interest rates and risk go hand in hand. A riskier investment will usually yield a higher return than a less risky security. But this is true for losses as well. For something like a retirement fund, you might not want to invest in highly risky investments as you may be left no money at all by the time you are old. So, a medium to low risk strategy that yields decent returns is the way to go when planning for retirement.