Were you appalled to read in the media last week that $1 million isn't enough for a comfortable retirement?
I think you would feel even worse if I told you that the figure is $1 million – each.
Recent articles in Fairfax media have declared that with $1 million not providing enough for a comfortable retirement, readers should be chasing double that amount.
How is an investor to create that kind of asset pool?
Particularly once children, time out of the workforce and high divorce rates are considered, hitting the magic $2 million is quite a task.
There are two key strategies:
- Start Early
Even if you're approaching retirement, most readers will have at least a ten-year period remaining to focus on growing their wealth.
Using compounding earnings, in ten years you can create outstanding returns depending on how well you do it.
You also earn a rising dividend, because your portfolio is fixed at the price you paid for a company, while earnings grow over time.
Buying Woolworths Limited (ASX: WOW) shares nine years ago for a flat $20 would have paid 3%p.a. in dividends at the time. Now, they're paying 7% – and that's before franking credits.
Plus you have the benefits of owning a great defensive stock that will continue to support you in retirement, and you've also captured capital gains of $9 a share that you can unlock if and when you need some extra cash.
Buying any old company won't do however – Wesfarmers Ltd (ASX: WES) shares haven't performed nearly as well. In fact their dividend rose from 5.4% in 2006 to roughly 5.5% (of their 2006 price) this year.
- Buy long term companies that you can hold through to retirement
If Woolworths' ten-year returns look good to you, imagine what 20, 30, or even 40 years could do?
Finding companies with long-term 'defensive' business models and holding them also reduces the workload on you because in one way, you're already preparing for retirement.
If a company is solid, providing long term, reliable earnings and dividend increases, then why sell it?
Carsales.Com Ltd (ASX: CAR) may not be right for the retiring investor because of its digital nature – disruptive and itself vulnerable to disruption eventually thanks to the fast-moving technology space.
Sonic Healthcare Limited (ASX: SHL) on the other hand delivers an essential service that isn't going away – diagnostic imaging and pathology services. Buying into Sonic at $15.90, near its peak in 2006, would have yielded 2.5% per annum.
Sonic's dividend has grown to 4.2% of that $15.90, and investors have picked up $4 a share in capital gains along the way.
I'm a long way from retirement myself, but I wouldn't mind seeing what 40 years of compounding earnings could do for my wealth.
