Becoming a millionaire is a common dream, but most of us never expect it to come true. Some of us won't need that much to retire comfortably, especially within the next few years. But most Americans aren't so lucky.
Many of us still have a decade or two to go before we retire, and few of us have a generous nest egg already saved. And because of the pernicious effects of inflation, the longer the time between now and our retirements, the more we'll need to save. Assuming inflation stays constant at 3% annually, in 20 years a $600,000 nest egg will only be worth just more than half that much in today's dollars.
The ability to out-earn inflation makes stock investing so powerful. Parking your money in a low-yielding savings account, by comparison, will leave you treading water at best, as your money grows at rates equal or less than it's being devalued.
You can aim to beat inflation by investing in special securities such as TIPS. But for your long-term money, stocks are hard to beat. Over the very long term, they've averaged close to 10% annual returns, handily beating inflation. Even an average of 6% would likely keep you ahead of inflation's hungry grasp.
In that light, stock investing may be the best and only way to earn the hundreds of thousands -- or even millions -- of dollars you'll need to retire comfortably.
Thinking clearly
Luckily enough, the younger generation seems to be on the ball when it comes to their retirement expectations. Roughly 85% of 18- to 29-year-olds think they'll need $1 million or more to retire; 45% expect to need at least $2 million. With average life expectancies consistently growing, you'll need more money if your retirement is going to last 10 years longer than your dad's.
Our Rule Your Retirement newsletter advises withdrawing 4% from your nest egg each year in retirement to make your savings last. Here's what that figure would amount to annually, based on varying amounts saved:
|
Nest Egg
|
4% Withdrawal for First Year
|
|
$400,000
|
$16,000
|
|
$800,000
|
$32,000
|
|
$1.2 million
|
$48,000
|
|
$1.6 million
|
$64,000
|
|
$2 million
|
$80,000
|
|
$3 million
|
$120,000
|
To amass that kind of moolah, you don't necessarily have to win the lottery -- just start early. A simple index fund earning 10% per year will turn an annual $5,000 investment into $900,000 over 30 years. If you can boost that average return up to 13%, you'll have more than $1.65 million.
You're rarely guaranteed a 13% return in life, but many familiar companies have delivered that or better than that over long periods. For example:
|
Company
|
20-Year Avg. Annual Return
|
|
Dell (Nasdaq: DELL )
|
31%
|
|
Schwab (Nasdaq: SCHW )
|
24%
|
|
UnitedHealth Group (NYSE: UNH )
|
23%*
|
|
Oracle (Nasdaq: ORCL )
|
20%
|
|
Stryker (NYSE: SYK )
|
20%
|
|
Walgreen (NYSE: WAG )
|
15%
|
|
Target (NYSE: TGT )
|
13%
|
Data: Yahoo! Finance.
*19-year average annualized return.
So think twice before you aim for less than $1 million. Otherwise, you might well be disappointed that your retirement funds don't stretch as far as you'd hoped.
Foolish food for thought:
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