This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Saving up enough money for retirement without investing it at some point along the way is (to put it mildly) very difficult. Even if you had 50 years to save $1 million, you'd have to stash away $20,000 annually, and that's not even considering the fact inflation will reduce the buying power of that $1 million over time. Consider this: $1 million in 2022 has about the same purchasing power as $150,000 did 50 years ago.
To ease your path to becoming financially comfortable in retirement, you should invest some of your money, specifically in stocks. They may be riskier than other investments like bonds or certificates of deposit (CDs), but that risk is more often than not worth the reward -- especially if you're investing long term in major indexes and blue chip companies.
Retirement likely won't be cheap
It's hard to say how much an individual might need in retirement, because it largely depends on location and lifestyle. But there is conventional wisdom you can use to give yourself a good starting point. The first step is applying the 80% rule, which recommends having at least 80% of your preretirement annual income in retirement to maintain your existing lifestyle. From there, apply the 4% rule, which will have you multiply that annual amount by 25 to receive a total savings estimate.
Following those rules, someone currently making $100,000 would need to save about $2 million. It may be all but impossible for most people to reach that amount just setting aside cash, but with time and compound interest, it's more attainable than you may realize. For example, with 10% annual returns -- the long-term average for the stock market -- here's roughly how much someone would need to invest monthly at different starting ages to reach $2 million by age 67 (the full Social Security retirement age for people born in 1960 or later):
- Age 25: $325
- Age 35: $850
- Age 45: $2,400
Growth is the priority when you're younger
As you can see, the earlier you start, the lower your regular savings burden becomes. But in order for our example to play out, you also need a solid rate of return, and in order to achieve that, you should be willing to invest with a focus on growing your money. Yes, this means taking on more risk, but with a long-term plan, you also have time on your side to recover from down periods in the market. If you were in your 30s during the Great Recession, it likely didn't break your retirement plans if you've stayed the course since then. However, if you were set to retire in 2008, you would need to adjust your strategy accordingly.
That's why as you get older and near retirement, your investments should become more conservative with your focus gradually evolving from strong returns to preserving your portfolio. But if you start your investing journey focused on preservation, you run the risk of not having enough saved for retirement. Most bonds and fixed-income investments offer returns in the low single digits, and that's oftentimes only enough to keep up with inflation.
Imagine if you invested $10,000 into the Vanguard Long-Term Corporate Bond ETF. Since its inception, that fund has delivered an approximately 5.5% average annual return to investors (which is in line with the long-term average for bonds overall). Assuming that average holds, your investment would be worth just under $50,000 after 30 years. Compare that to an equal investment in an S&P 500 index fund, where even a relatively conservative 7.5% average return would be worth almost $88,000 over the same holding period.
Of course, bonds carry far less risk (although some bond issuers do default), while stocks for even the biggest companies can see wild swings. But for anyone still relatively early in their savings journey, you're likely to regret missing the opportunity to accelerate your progress toward your retirement goals with some stocks that can boost the long-term growth of your portfolio.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
