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

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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.

Six growth stocks for any portfolio
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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.

1 Key Step to Get Rich

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Feb 1, 2016 at 4:54PM

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