What's your dream retirement look like? It's probably some form of doing what you want, when you want. That lifestyle requires wealth -- at least enough to pay the bills and fund your hobbies and activities. And if you have expensive tastes, your dream retirement could require you to be downright rich.
There are different ways to retire rich. You could win the lottery, for example. Or you could inherit money from a rich uncle you never met. But the most realistic path for retiring wealthy involves investing in the stock market. Read on to find out why.
1. Investing can fit your budget
You can start investing with just a few bucks. All you need is an account with any brokerage that supports fractional shares. This is also called dollar-based investing: You invest by dollar amounts rather than share counts.
Depending on the brokerage, you can buy into a stock for as little as $1. You'd then own a fraction of a share, equal to your investment amount divided by the share price. So, spend $1 on a stock that's priced at $100 and you'll own 1/100th or 0.01 shares.
Your fraction will grow in value like a whole share and earn fractional dividends, too.
Other wealth-creation strategies don't offer the freedom to set your own starting budget. To buy rental property, you need a down payment. To start an online business, you at least need funds for website hosting.
2. Stock market returns are stronger
The stock market's long-term average growth rate is about 7% after inflation. That return blows away average returns on cash and cash equivalents. Between 1928 and 2021, the average inflation-adjusted annual return on a three-month Treasury bill is 0.35%.
If you invest $250 monthly at a 7% annual return, your money will grow to about $285,000 in 30 years. Of that total, $90,000 is your investment and $195,000 is your earnings.
Change the growth rate in this scenario to 0.35% and your ending balance will be $95,000. Here, you invested $90,000 over 30 years and made $5,000. You can't retire rich that way.
3. Stock market risk can be moderate
There are other wealth strategies that have higher returns than publicly traded stocks. Launching a successful business is one. You could also get a job with a start-up and negotiate equity options as part of your compensation package. I've done both, but my stock portfolio is still the shining star of my finances.
This is because high-reward opportunities are risky. Your results will fall somewhere between making a bunch of money and losing a bunch of money. That range of outcomes is too wide for your retirement strategy. While you could get rich via entrepreneurship or through a start-up, you'll want a backup plan, too.
Stock market investing, by comparison, can be relatively reliable. Here's a stat to prove it: The market has never lost value over periods of 20 years or more.
You can build wealth from that behavior. Do it by investing in a low-cost, broad-market exchange-traded fund for at least two decades. Stay invested even when the market gets turbulent. Take that approach, and you're more likely to make money than to lose it.
Your rich retirement
Investing can be the key to retiring with enough money to live comfortably. You can start small today and increase your investing budget as you gain confidence. Remember the 20-year plan and stick with it. Later, when you've dramatically upgraded your wealth, you'll be glad you persevered.