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Thayer Partners Blog

Retirement Planning’s Secret Weapon: Systematic Investment Plan (SIP)

[fa icon="calendar"] Apr 22, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Retirement_Plannings_Secret_Weapon-_Systematic_Investment_Plan_SIP.jpgPlanning for retirement isn’t easy—especially when it comes to ensuring you’ve saved enough money to live comfortably after your last day on the job. Even if you save from an early age, it likely won’t be enough, considering the increasing life expectancy and cost of living in America. You need to invest your savings to make them grow. But we know that the market can be intimidating, time consuming, and a bit scary to enter due to investment risks, especially when you don’t have any prior knowledge or experience.

But when saving for retirement, you can make your money work for you in an easy and convenient way—you can invest in a systematic investment plan (SIP) to increase your savings.

Here’s how a SIP can be your secret weapon for retirement.

What Is a SIP?

A systematic investment plan isn’t a product that you invest in, in and of itself, but rather, it’s a strategy to help you save regularly.

Helping You Save Regularly

To save for retirement, you must be diligent. You must be committed and disciplined. But in reality, when you’re busy with your family, your job, and the rest of your responsibilities, it can be very difficult to invest regularly. Who has the time? A SIP can help you by making your investments as simple and convenient as possible. You just need to initially set up regular withdrawals (say, monthly or quarterly) from your bank account. Once this initial set-up has been made, then you never have to worry about your investment again. The funds will keep getting regularly invested in a mutual fund, just like a recurring deposit to pay your fixed monthly bills.

Making Fluctuations Work to Your Advantage

Even the best investors and advisors can’t predict the market and prices. It’s nearly impossible. And trying to do so can be time consuming and stressful—which is a big reason why many people don’t invest. You don’t want to worry about buying high and selling low. With a SIP, though, you can make these market fluctuations work to your advantage. When you program your investment through a systematic investment plan, you get to benefit from Dollar Cost Averaging. This is a strategy of investing a fixed amount at regular intervals without having to worry about market dips. Your regular money deposits will buy more units automatically when the price is low, and fewer when the price is high. With Dollar Cost Averaging, you benefit from a lower average cost per share over the long term. This big underlying assumption here, of course, is that the investment you choose grows over the long term.

The Power of Compounding

When saving for retirement, you want your money to work for you—you want the money you already have to make you more money without effort. The interest you’ll get from a regular savings account just doesn’t cut it when you’re thinking of funding your entire retirement, which can be difficult when you’re planning for an uncertain life expectancy. With a SIP you also get to take advantage of the power of compounding, which is the financial equivalent of a snowball rolling downhill. Your investment will get bigger and bigger every year with compounding interest because your yearly earnings will contribute more to next year’s earnings, and so on and so forth. As time passes, your total value of investment grows considerably. Again, the assumption here is that the investment grows over multiple years.

Do It Right

Using a SIP can help you save for retirement, but only if you do it right. The key here is to start early and stick to it for the long term. Systematic investing is a long-term strategy—it isn’t a get-rich-quick scheme. Consistently contributing on a regular basis over a decade or more and letting your money increase year after year is how you’ll save enough to enjoy a stress-free retirement.

Systematic investment plans do not assure a profit or protect against loss in declining markets. Such plans involve continuous investment, regardless of market conditions. Markets will fluctuate, and clients must consider their ability to continue investing during periods of low price levels.

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Topics: Retirement Planning, SIP

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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