The Incredibly Simple Thing You Can Do to Retire Rich

There is one thing that younger investors have that can build massive wealth for their future. Here's how to make it happen!

Feb 15, 2014 at 12:45PM


Photo: Rick Hunter

For all of the readers in their 20's and 30's out there, now is the time to take full advantage of the most valuable asset that you have: Time.

It is exponentially easier to create not only a comfortable future but your dream retirement, if you just have the foresight to start early. Even if you don't have too much to invest, something is better than nothing, and you might be surprised how the power of compound interest can build your wealth over time.

A simple scenario
Let's consider a scenario where a 21 year old starts stashing away $100 every month in an IRA ($1,200 per year), and keeps this up until he or she retires at age 65. This means that the total lifetime contribution to the account is $52,800. 

If we assume just a 7% annual total return on the investments (very modest on a historical basis), the account would be worth approximately $330,000 when the account holder is ready to retire. With a 10% annual return in stocks, which is more in line with historical averages, the ending balance would jump to nearly $825,000, or more than 15 times the total amount that was deposited into the account!

Now here's the key point: This $825,000 drops to $310,000 if the investor didn't start for another 10 years (age 31). In other words, starting 10 years earlier would mean about 266% more money once retirement arrives. And it only gets worse...

How to get started
If you are so inclined, it can be a great idea to do some research and pick some individual stocks to invest in. However, for beginners, or for those who just want to invest without worry, try an index fund like the SPDR S&P 500 ETF (NYSEMKT:SPY), the oldest and largest ETF in the market. 

Essentially, the fund invests in all 500 of the stocks included in the index on a weighted basis, and the returns (and dividends) are passed through to you, the investor. The fund has a net expense ratio of just 0.09%, one of the lowest in the market, and the S&P has averaged an annual return of 10.26% over the past 25 years.

For those who may want to add a little diversity, consider a foreign stock fund or a specific sector's index fund. If some added safety is a priority, a bond fund can provide safe income and protect your principal.

Contribute what you can
Believe me: I know that money can be tight for college students. Even so, once you have a part-time job, take just some of the money that you would normally use for having fun and set it aside for your future. If you wait tables and make $60 in the average night, set away $10. Odds are you won't even miss it, and it will really have a massive impact over the long run.

As your income improves over time, increase your contributions. Not only is it important to continually put money aside for your future, but your investment dollars have less time value as you get a little older.

Time is on your side
No one can predict the future, but stocks have outperformed every other major asset class throughout history. Younger people today can't have the same reliance on retirement income sources such as pension plans and social security as their parents and grandparents did. Pensions are quickly becoming extinct, and Social Security keeps raising the retirement age. The standard age for S.S. benefits could be 80 years old by the time you get older, and benefits could be half of what they are today!

The point is you shouldn't assume these things will be there for you. If you want your dream retirement and full financial security in your old age, it is within reach, but you need to make it happen for yourself.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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