If you're worried, or at least a little nervous, about retirement, I wouldn't blame you. Contemplating the start of what could be decades of not working and not receiving the primary source of income we've all gotten used to in our working lives is a big adjustment to make.
It's no small feat to set up your finances to ensure you don't run out of money when you're in your eighties or nineties.
In a recent survey, State Street Global Advisers found that just 20% of respondents in 2023 expected they would be able to save up enough to retire. That was down from 25% in 2022 as well. The vast majority (73%) of those surveyed cited inflation and cost of living pressures as the most relevant factor for their answer.
If you're worried about retirement, investing in ASX shares before you reach retirement age could be the biggest favour you do yourself. Thanks to the effects of compounding, this favour will become more significant the earlier you get started.
Let's assume someone who is 60 years old and wants to retire at the age of 65 invests $10,000 into ASX shares. If this investor manages to achieve a 10% rate of return (not a guaranteed return by any means) by reinvesting their dividends, they will have approximately $16,453 by the time they get to the age of 65. That's decent. But probably not enough to make a big difference to their retirement prospects.
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How to add years of enjoyment to your retirement
But instead, let's assume that our investor puts that $10,000 into ASX shares at the age of 45 and lets it compound for 20 years. By the time they reach their retirement age goal of 65, that $10,000 will have grown into $73,281. Now we're starting to see a difference in their retirement goals.
Let's now assume that our investor puts $10,000 into ASX shares at the age of 25 and just leaves it until age 65. At this 10% rate of return, they will have around $537,000 by age 65. That's enough to add years of enjoyment to a retirement.
These numbers show the exponential power of compounding if given enough time.
But if you're past the age of 25, there are still some things you can do to speed up the compounding process. Let's go back to our hypothetical investor who starts investing when they're 45 years old.
By just ploughing $10,000 into ASX shares at age 45, they will end up with just over $73,000 by age 65, as we touched on earlier. But if this investor manages to find an extra $100 a month to invest, they can potentially double that final outcome to just under $150,000.
If they stretch even further and make it an extra $100 a week? They'd be looking at a potential $400,000 portfolio by the time they hit retirement age.
If our investor, who starts at age 25, came up with that $100 a week in extra investments, they would be sitting on a nest egg worth an astonishing $3.28 million.
Investing in ASX shares at any age can produce wealth-building effects. But those effects are magnified dramatically if we increase our periodic investments and time horizon. It's more than enough to add years to a comfortable retirement at any age.
