If you're at the start of your investment journey and already dreaming of an early retirement, then you might be pleased to learn that it isn't impossible to make it a reality even if you invest modestly.
The key is starting early so the magical power of compounding is able to grow your wealth.
Warren Buffett explained the power of compounding perfectly in the video below.
Is it possible to retire early by investing $100 a week?
I'm now going to show you how investing $100 a week in ASX 200 shares could allow you to retire early.
Over the last 30 years, the Australian share market has provided investors with a return of 9.58% per annum according to Fidelity.
And while past performance is certainly not a guarantee of future performance, this level of return is in line with what Wall Street has provided US investors with over the last century. So, I would be a little disappointed if the ASX 200 index doesn't deliver a return of at least 9% per annum over the next three decades.
Especially given the quality of many ASX 200 shares such as CSL Limited (ASX: CSL), Goodman Group (ASX: GMG), and Macquarie Group Ltd (ASX: MQG), which look well-placed for long term growth.
If the ASX 200 does return 9% per annum over the next 30 years and your $100 a week investment matches this return, then you'll have grown your wealth significantly by 2052.
$100 a week or $433 a month earning a 9% per annum total return would turn into approximately $742,000.
What if we postpone retirement slightly?
Let's postpone those piña coladas on the beach slightly and let compounding really work its magic. After all, you've done the hard work now, so let's see what happens if you let your investment just run.
If you stop adding to your investment and just let it compound, that $742,000 would turn into the following if it continued to earn the same return:
- 1 additional year – $808,000
- 2 additional years – $881,000
- 3 additional years – $960,000
- 4 additional years – $1.05 million
- 5 additional years – $1.14 million
Don't forget the dividends!
But wait! There's even more to consider. The ASX 200 index generally offers investors a dividend yield of 4% each year. If your investments are also earning this level of yield, then that $742,000 investment would be yielding a handy $37,000 in dividends at the 30-year mark.
Overall, I feel this demonstrates why investing in ASX 200 shares with a long term goal is a smart thing to do when you're young.
