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Here’s how you could retire with $2,655,011

Did you know, less than half of Australians over 50 are looking forward to retirement?

Maybe I’m an exception to the rule but I definitely am because…

Earlier in the week, I wrote an article which highlighted what I believe could be the easiest way for ordinary investors to double their share portfolio within 10 years.

If you missed it, Albert Einstein sums up my article with his timeless short quote:

Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.

There’s one easy (some might say “lazy”) method which many Australians have used, for over 100 years, to turn something small into something HUGE.

Below, I’ll show you a very simple method which can enable you and every Australian, to turn a relatively small amount of money into something truly breathtaking by the time you retire.

First you need to consider these words from renowned AMP Capital economist, Dr Shane Oliver, who said since 1900: “Over all 40-year periods and virtually all 20-year periods shares trump bonds and cash.”

But how can I retire with $2.6 million? I hear you say.

The answer: Compounding returns.

For example, since Australian cash has returned an average of 4.8% pa since 1900, $1 invested back then, would today be worth $214 today.

…boring…

However, suppose that same investor instead put $1 into Australian shares and reinvested all of his or her gains. Today that $1 would be worth over $395,000! That’s because, according to AMP Capital, Australian shares have averaged a 12% return over the past 114 years.

For obvious reasons, none of us have that amount of time to invest. However with a little more capital and regular payments to your stock broking account, I believe it’s possible for the average investor to retire with a huge amount of money.

Hypothetically let’s say your 40 years old, have $15,000 to invest, can contribute $1,500 into your stock portfolio every month and achieve the market’s long-term return of approximately 12% per annum.

Thanks to Einstein’s “eighth wonder of the world” by the time you reach age 65, your portfolio will be worth $2,655,011!  

However, if you start at 50, the final value falls to around $750,000 and if you wait until age 55, you’ll have just $362,000. Although it’s still a fortune, it’s not nearly as impressive as $2.6 MILLION.

There is one BIG risk to this investment strategy however, it’s YOU (and me!). For example, during times of extreme uncertainty, many investors will stop adding their regular monthly installment and sell all their stocks at a loss because they’re fearful of the market’s volatility. I’ve done this many more times than I’d care to admit.

I’ve done it even when I know my stocks will survive the deepest of recessions.

Then there’s the risk that you’ll never achieve market-beating returns or even match its performance.

This is a very real risk to our investment strategy.

Motley Fool Columnist Morgan Housel recently highlighted a study which found the average US investor’s stock portfolio returned just 5.02% per year between 1993 and 2013 while the S&P 500 climbed 9.22% per year.

So, I’m not telling you to go out and buy shares in Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) or even BHP Billiton Limited (ASX: XJO) because they’re the most reliable and well known Australian companies.

In my opinion, you have two obvious choices in regards to how you can beat the market:

1. You can, like me, invest for yourself, or,

2. You can get someone else to do it for you.

I believe number one is easily the best option for those with an understanding of the market but, if you’re not willing to risk your life savings, you’ll probably want to leverage the ideas of some great stock advisors before you dive in head first. Remember only you have your best interests at heart…

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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