Retirement is an easy thing to lose sight of in the day-to-day hustle and bustle. But planning for retirement is one of the most important things we will do in our lives. Maybe it seems a long way off. But let me tell you, time moves quickly as we age, and putting off saving and investing makes it more challenging to have the lifestyle we desire in our golden years.
The good news is that there are several options to reach your goals, like:
- Save your way to a million.
- Rely on risk-free interest.
- Invest in dividend growth stocks or the S&P 500.
- Find a unicorn.
Let's take a look.
Does slow and steady win the race?
There's a great lesson in the tortoise and the hare story, but it may not be the best when it comes to saving for retirement. It's a myth that most people can "just save" enough money to retire comfortably. Yes, you can grow $100,000 into $1 million this way, but it takes way too long and requires massive income.
If you managed to squirrel away $1,000 per month and did not invest, it would take 76 years to go from $100,000 to $1 million. You could up your savings to $2,000 per month and make it in 38 years, but neither scenario is realistic for most people. The verdict on scenario No. 1? No, thank you.
Interest rates are rising, and earning a risk-free 5% on a certificate of deposit (CD) or U.S. Treasury is tempting. There is no need to check the market, no risk of losing your principal, and no study or expertise required. But this process is also too slow for most people. It would take nearly 50 years to turn $100,000 into $1 million by earning 5% compounded annually. So, option No. 2 is out.
But what happens if you combine the two options? You could make it to $1 million by saving just $500 monthly and earning 5% interest in 33 years. Assuming a retirement age of 65, you'd need to start this process by 32 years old. That's certainly not out of the question, but still not the best option.
Invest in dividend growth stocks
The S&P 500 has averaged 10% returns, including dividends, over the past 30 years. At this rate, you cut your time to $1 million down to 25 years. This is much more realistic and doesn't require additional savings. However, if you also save and invest $500 per month, the time can be reduced to under 20 years.
Several terrific dividend growth stocks have performed wonderfully over the past 20 years and beat the overall market, as shown below.
Total Return Level data by YCharts
The chart above shows the growth of $100,000 over the past 20 years, including dividends. Starbucks and Home Depot easily exceeded the million-dollar mark, while Lowe's and Texas Instruments made strong showings. All of them beat the overall market.
Perhaps the best thing about dividend growth investing is that you don't need any particular expertise to understand and invest in them. Most consumers are familiar with the two mammoth home improvement stores and the Seattle coffee seller. Texas Instruments sells analog semiconductors, and even if you aren't familiar with them, you probably use them daily, and they aren't particularly high-tech. For more on Texas Instruments, check out this article on the power of dividend growth investing.
Find a unicorn
What do Tesla, Nvidia, and ServiceNow have in common? They have grown $100,000 into more than $1 million over the past 10 years, as shown below.
Nvidia is the big winner, and kudos to anyone who got in early. This is the most exciting (and quickest!) way to reach $1 million, but also the most risky and difficult. For every Tesla and Nvidia, there are heaps of companies that never take off. They are also challenging to find in their infancy. Few predicted that Nvidia's technology would beat the competition and be critical to today's data center needs back in 2013.
What is the fledgling investment now that will be critical to the economy in 2033? Artificial intelligence (AI) seems like the most obvious area, but even this isn't guaranteed. Remember, 3D printing was forecast to change the world several years ago, but that trend fizzled quickly. Still, many believe that AI will be as transformative to the economy as the internet in time.
Ask any retiree, and I'll bet one of their biggest regrets will be not starting investing early enough or getting educated about money management. There are several ways to reach your retirement goals, but the best way is to invest in knowledge first. Your ultimate plan will depend on your age, risk tolerance, and lifestyle. Often, a combination of saving, interest, dividend growth stocks, and a sprinkle of moonshots is the best recipe.
