Investing is crucial to retiring rich. Here's why

If you want to get wealthy and stay wealthy investing is the easiest path.

| More on:
Model house with coins and a piggy bank.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Everyone wants to have a comfortable retirement without worrying about having enough money to cover their regular expenses, and enough left over to fund hobbies and a few vacations. But some of those same money anxieties can stop you from investing for retirement.

Here's the thing, though. Investing is crucial to retiring rich. Stockpiling cash alone probably isn't enough to get you to retirement with enough savings, and even then, eschewing investing in retirement could lead you to run out of money.

Why you need to invest for retirement

Which of these scenarios sounds more feasible?

  1. Save $25,000 per year for 40 years
  2. Save and invest $3,000 per year for 40 years

Obviously saving $3,000 is easier than saving $25,000. But by investing that $3,000 in the stock market -- even in something as simple as an index fund -- you'll be able to end your 40-year career with about the same amount of money as you would if you'd stuck $25,000 of cash into a savings account every year.

Over the last 50 years, the S&P 500 has produced a nominal return of 9.4%. At that rate, $3,000 per year will turn into more than $1.1 million in 40 years.

In fact, if you want to retire rich, you'll probably need a lot more than $1.1 million 40 years from now. Even with modest inflation of 2.5%, that amount will be worth just a bit more than $400,000 in today's dollars. So, saving $25,000 in cash may not even be enough to get you to retirement in 40 years.

Staying there

You might have heard of the 4% rule. It's a simple way to figure out how much you can spend in retirement. If you hold a portfolio evenly split between stocks and bonds, you'll be able to withdraw 4% of the starting amount every year without running out of money during a typical 30-year retirement.

Now, you may be thinking, won't I be able to withdraw 4% for 25 years if I just leave everything in cash? Of course you could, but that strategy has a few big problems. First of all, there's no inflation adjustment. The 4% rule includes inflation adjustments, so if we have a year of high inflation, you'll be able to maintain your quality of life by withdrawing a bit more from your portfolio.

Second, the all-cash strategy guarantees you'll run out of money at 25 years. What if you're still alive and kicking 25 years post-retirement? You'll be relying entirely on social security. That's not what anyone would call a "rich retirement."

In the vast majority of cases, the 4% rule results in a portfolio nominally larger than the starting portfolio after 30 years. That protects you against living a very long life, may give you some buffer for unexpected expenses later in life, and ensures you have something to leave to your heirs.

Investing your cash is the only way you can realistically obtain enough savings to retire with enough money to fund your living expenses, vacations, and hobbies. And if you don't stay invested through retirement, you'll probably run out of money and find yourself pinching pennies later in retirement.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

electric vehicle such as Tesla being charged at charging station
International Stock News

Why did the Tesla share price just tumble 7%?

Nasdaq investors just sent the Tesla share price sharply lower.

Read more »

A woman is excited as she reads the latest rumour on her phone.
Broker Notes

Goldman Sachs says this US stock is replacing Tesla in the Magnificent Seven

And no, it's not a tech company. It's in the healthcare sector.

Read more »

A man looking at his laptop and thinking.
Share Gainers

Should I buy Nvidia stock as an Australian investor?

Many Aussies are thinking of jumping on the bandwagon, but they need to think about these issues first.

Read more »

Digital rocket on a laptop.
Broker Notes

Is the Nvidia share price on course to reach US$1,400?

You betcha, says one analyst.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Could Nvidia become the most valuable stock on earth?

Can anything stop the Nvidia stock price?

Read more »

A group of young ASX investors sitting around a laptop with an older lady standing behind them explaining how investing works.
International Stock News

What can ASX investors learn from Warren Buffett's latest buys and sells?

We've just found out what Buffett's been buying and selling recently.

Read more »

electric vehicle such as Tesla being charged at charging station
International Stock News

Why Tesla stock tanked in January

Will the electric vehicle leader see earnings decline once again in 2024?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
International Stock News

Will Nvidia stock be worth more than Microsoft by 2030?

The graphics giant has been growing at a much faster pace than Microsoft, but can it sustain that momentum?

Read more »