I recently watched a video on investing that talked about the importance of timing when it comes to retirement. What the video said that was true is about how much more one can have available over their retirement if one retires at the beginning of a rising market compared to one that is declining.
As true as it was, it got me to pondering, and as I watched a few more videos on the subject I realized that there have been some important pieces of information that have been overlooked when it comes to the benefits of saving.
It is true that people need to maximize the amount that they accumulate while they save, but there is a significant and forgotten reason to save that is also important for the long-term health of our economy. That truth is how essential it is for all public companies to be able to have the working capital and resources necessary to continue to build the businesses that will employ our future generations.
The average person doesn’t stop to think how much money it takes for a company to be able to employ each of their employees. Many think a company is making profits and that these can be used to employ additional staff as needed. This is only partially true, as available profits are often cut in half through the issuing of dividends back to their shareholders. This can leave a pool of money that may be significant, yet not be significant enough to expand the company as much as necessary.
If earnings are not enough, people naturally think next about the idea that these companies can simply borrow the money they need to expand, as everyone is doing personally now at record levels. Yes, it is true that debt can help, but a company that is highly leveraged, as so many are today, is not a company that is well able to withstand a strong downturn in the economy when it comes.
A healthy company with a strong balance sheet is one with significant owners’ equity, meaning that the largest component of their working capital comes from non-debt. This is because these funds don’t need to have an immediate return on them (or a cost in terms of interest) when times are tough.
If you look at many of our largest companies today, you will see that owners’ equity is a rather large number. In fact, when you take that number and divide it by the number of employees that the company has you will find that these companies normally have between $100,000 and $200,000 worth of retained earnings per employee. That is how much investment it takes to keep a company going over the long term. It is not a small amount of money by any measure.
This money can’t be short term money either—it’s money that is necessary over the long haul, for decade after decade if the company is to prosper long term.
Think back to the generation before you, to those people who invested so that you could have a career and feed your family, as well as make a return for the shareholders. For our society to perpetuate this success it must have the savings of its citizens, and it will need that money invested for the long haul.
So now that responsibility falls to us who are getting older. Have we done what is needed so our country’s firms will have what they need to employ our kids and grandkids?
Yes, we need to start saving more…and for more than the return it can give us for retirement.