Want to be a rich retiree? There are three ways to do that: Win the lottery, save an absolute fortune, or invest in stocks. And for most people, only one of those three techniques is viable: Investing.
Putting your money into the stock market is the surest path to building wealth that will not just sustain you, but that will help you become wealthy in your later years. Here are three reasons why.
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1. Stocks grow your retirement nest egg
The stock market consistently produces a 7% average annual return, so investing in index funds that track market performance is likely to net you this ROI. If you pick individual stocks wisely and beat the market, you could do even better -- a 10% average annual return isn't unreasonable to expect. But if you simply put your money into a high-yield savings accounts or "safer" investments such as bonds or CDs, you're likely to get a far lower return.
Most Americans think a personal net worth of $2.3 million is needed to be rich. If you start investing for retirement at 30, here's how much you'd need to save annually to hit that target by age 65, based on your rate of return.
|
4% Annual Return |
7% Annual Return |
10% Annual Return |
|---|---|---|
|
$31,200 |
$16,650 |
$8,500 |
With median household income coming in at $61,937 according to the Census Bureau, saving $8,500 should be doable for most families. Even hitting that $16,650 goal is possible with a little sacrifice (especially if you're investing in tax-advantaged retirement accounts and getting an employer match). But $31,200 is likely to be out of reach for the majority of Americans.
This means you need to earn the kind of return that only stocks have consistently provided if you want to be rich as a senior.
2. Stocks can earn money even once you stop working
For most people, working forever isn't an option. And when you stop working, you stop earning. But when you invest in stocks, your money can earn for you, and it never gets old or needs to quit.
Seniors shouldn't have their entire portfolio invested in stocks because they'll need to take money out and won't have time to wait out downturns in the market. But they should have some invested. To figure out how much, subtract your age from 110. So if you're 65, you'd have 45% of your portfolio invested in the market.
If you had a $2.3 million nest egg and invested 45% of it in the market, you'd have around $1.035 million in stocks. If that money earned the expected 7% average annual return, your stocks would earn you more than $72,000. That's pretty good money considering your stocks won't ever have to retire. Many people would even think that's enough to make them rich.
3. Stocks can pay you to own them
When you invest in stocks, you can grow your wealth as they appreciate in value. You can also buy stocks that directly pay you to own them. You can do this by investing in dividend stocks.
With dividend stocks, you get paid a portion of company earnings for each share you own. They provide a steady, reliable profit stream, and the dividend helps anchor the stock price since your dividend yield rises if stock prices fall.
There are lots of dividend stocks that are perfect for retirees. If you build a portfolio of strong companies with the financial stability to continue paying promised dividends over the long term, you can count on steady income. Invest in enough of them and your dividends alone could give you enough income to make you rich.
How to end up a rich retiree by investing in stocks
Investing to build wealth doesn't mean looking to get rich quick or double your money overnight. Instead, it means putting your money into high-quality companies you've researched carefully, or into a diversified portfolio of index funds. If you do that over your career, you're almost 100% guaranteed to get rich by the time you're a retiree.
