Reaching retirement is a goal for most people, but it certainly isn’t easy.
I think it’s important that we don’t fall in traps that could hinder our journey to achieving a comfortable.
Believing these two myths could seriously cost you:
You can’t do it
When people think about retirement they might think that reaching $1 million is impossible. Reaching a $1 million retirement fund may not be possible for people that don’t have full-time work for most of their life, but for the rest of us it’s definitely possible – even if it’s just contributions into superannuation.
Just think of this, if you start with $0 and invest $1,000 a month for 25 years into shares that achieve an average return per annum of 10% you would end with almost $1.2 million.
That means a 40 year old, starting at $0, could finish with $1.2 million by 65. A very respectable finish!
Assets will definitely keep returning 10% per annum
However, it may be a mistake to think that shares will keep returning 10% a year. There are two things that make me believe that returns are likely to compound at a much slower rate over the next few decades compared to the last three.
One, interest rates have significantly fallen over the past three decades which have been a slow-and-steady tailwind for share valuations. This isn’t going to be repeated, so even if earnings growth is exactly the same into the future there won’t be the same capital growth. Interest rates are quite likely to rise at some point so that would be an even bigger hurdle for share returns.
Two, the population is ageing. A higher and higher proportion of the population is going to be leaving the workforce which is likely to cause slower growth for the overall share market. However, there are plenty of shares that could benefit including Lifestyle Communities Limited (ASX: LIC), Eureka Group Holdings Ltd (ASX: EGH), Japara Healthcare Ltd (ASX: JHC), InvoCare Limited (ASX: IVC), Ramsay Health Care Limited (ASX: RHC) and Challenger Ltd (ASX: CGF).
I think that it will mean that people currently saving for eventual retirement will need to save more money during the process themselves because they won’t have the same tailwinds of lowering interest rates and economic growth.
Reaching a respectable retirement nest egg is definitely possible, but I think we’re going to have to work hard to get there. That’s why I’m trying to find the best long-term shares I can for my portfolio.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended InvoCare Limited and Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.