The markets may be volatile right now, and in the near term it may appear unclear about where the economy is headed. But if you are investing for retirement, you have to look past these short-term market fluctuations to focus on the long term -- 10, 20, or even 30 years out.
History has shown us that bull markets last longer and outperform bear markets over time, and that the S&P 500 has generated about a 10% annual total return over the long haul, so keep that in mind as you build your nest egg. And if you follow three simple steps, you could watch your retirement savings grow by a factor of 10 -- or more -- without much heavy lifting.
1. Start early
Starting early, without question, is the most important factor in supercharging your retirement savings. The more time you are invested in the market, the more time you have for your investments to compound, or gain earnings on top of earnings.
Just consider how much more you would make with 30 years in the market compared to 20 years and 10 years. If you started with $10,000 and earned 10% per year on that investment, with no additional contributions whatsoever, you'd have about $26,000 after 10 years. After 20 years, that $10,000 would grow to about $67,000, and after 30 years, it would amount to almost $175,000. Time in the market alone would grow your gains by about 7 times after 20 years and nearly 17 times after 30 years.
2. Don't overthink your investment strategy
Investing can be daunting, as there are literally thousands of stocks out there to choose from -- and if you are a novice, it is hard to know where to begin. But you really don't have to overthink it, because there are investments called exchange-traded funds (ETFs) that allow you to have a diversified portfolio of the best companies in the world. ETFs trade like stocks but hold portions of all the stocks in a given index or benchmark. There are ETFs that track the S&P 500, the Nasdaq-100, and the Russell 2000, as well as various investment styles, sectors, and industries.
I would simply start with one or two: an ETF that tracks the S&P 500, like the SPDR S&P 500 ETF, or an ETF that tracks the Nasdaq-100, like the Invesco QQQ (QQQ -2.07%). With a longer time frame, the Invesco QQQ would be an excellent choice. The technology-focused ETF -- which has Microsoft, Apple, and Amazon as its three largest holdings -- has been a stellar performer over time. While aggressive growth investments are subject to more volatile short-term fluctuations, they typically outperform over the long term.
For example, over the past 10 years (as of April 17), the Invesco QQQ has posted an average annual return of 17.8%, while the SPDR S&P 500 ETF has had an annual return of 12.4%. If you go back 20 years, the Invesco QQQ has had a 14% annual return versus 10% for the SPDR S&P 500 ETF.
3. Increase your contributions
The third simple step is to make contributions to your investing account and boost them over time as your salary increases. Start by making modest contributions -- for example, $25 per month. Let's look at the impact of contributing an extra $25 per month on top of that initial $10,000, over 20 years, with a 14% annual return, assuming an investment in the Invesco QQQ. That initial investment would grow to roughly $194,000, compared to $162,000 without any contributions.
Now if you bumped that up to $50 per month, it would be around $227,000 after 20 years, and if you increased it to $100 per month, you would hit $292,000 after 20 years (assuming the 14% annual Invesco QQQ return).
Obviously, the more you can contribute, the better. But even if you boosted it by $25 with every raise, you probably wouldn't miss it in your daily life, but you certainly would appreciate it when it came time to retire.
Investing for retirement does not have to be hard. In fact, these three simple steps could help you 10x your retirement savings with very little effort -- and just some patience.
