ASX stocks could be the ticket for younger investors to become a lot wealthier over time. Investing just $500 per month can compound into a very pleasing figure by retirement.
It's easy to underestimate how powerful compounding can be. One of the world's greatest ever minds, Albert Einstein, once supposedly said:
Compound interest is the most powerful force in the universe. Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't pays it.
Someone who is 30 now may have 40 years to grow their nest egg until retirement age. People can retire earlier than 70 if they're able and willing to.
How much could someone's wealth actually grow? Let's take a look.
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The long-term goal
Growing wealth towards retirement can take a while, but it's very rewarding to see it grow over time. Planting a sapling (in the right place) will become a sizeable tree – but we need to be patient.
I think it's a great move to regularly invest in ASX stocks. The ASX share market has returned an average of 10% per year over the ultra-long-term. That level of return is very satisfactory.
For example, if $5,000 were invested today and it grew by an average of 10% per year for 40 years, it'd become $226,296.
It's hard to say what a good figure will be for retirement in 40 years from now, but it'll probably need to be more than $226,000.
In the current inflationary environment, it could be harder to save $500 per month. However a household does it, to invest we need to spend less than we earn to unlock those monthly savings.
If someone invested $500 per month and it grew by 10% per year for 40 years, it'd become $2.65 million. That'd be a really nice level of wealth, in my eyes. Remember, it assumes investing $500 throughout the process. Being able to invest more during some later years will help it become much larger.
How can someone accelerate reaching retirement?
I'd understand wanting to retire earlier than 70, and there are two main ways to do so.
Firstly, someone can invest more each month, though that's easier said than done.
Second, we can choose investments that deliver higher returns. For example, if an investment returned 12% per year, then investing $500 per month would grow to around $2.6 million in 35 years – seeing stronger returns could shave 5 years off retirement age.
I'd look at ASX growth stocks and international shares as ideas that could outperform the wider ASX share market. One exchange-traded fund (ETF) to consider is Vanguard MSCI Index International Shares ETF (ASX: VGS). There are plenty of great ASX growth stocks at good prices right now.
