Do you feel like you're behind on your retirement savings goal? If so, you're not alone. Numbers from the National Institute on Retirement Security (yes, that's a real thing) suggest over three-fourths of Americans believe their current nest eggs aren't as big as they should be by now. For more than 20% of the respondents to the institute's recent poll on the matter, that's because they're not saving anything at all. Presumably, they just can't.
The good news is, if you're young enough and at least have something tucked away for retirement already, you may be in better shape than you think. You may even be able to grow your current nest egg by a factor of 10, in fact, if you've got 25 years -- give or take -- before you have to start dipping into your eventual retirement stash.
You'll just want to stick with the simplest of rules.
Starting out is always slow
Sounds too far-fetched to be true? Believe it. The key is putting your savings into history's most proven way to beat inflation and grow real wealth. That's the stock market. Savings accounts and CDs just won't cut it, even at their recently raised interest rates.
If you're a new investor (or even if you're not a new investor) and that prospect makes you nervous, don't be. You don't have to become an expert stock picker. In fact, you shouldn't try to pick individual stocks at all. You're far better served by simply stepping into the overall market using an index fund like one based on the S&P 500 (^GSPC 0.32%) itself. That's just a basket of roughly 500 of the U.S. stock market's biggest companies; Standard & Poor's and your fund company will handle any necessary swap-outs to these constituents.
But isn't the stock market itself risky? It's gotten a bad rap it doesn't deserve.
Sure, it can be risky if you end up taking on too much risk with too little a chance for a meaningful reward. And there are plenty of companies and people out there overstating a stock's potential upside while understating its risks.
By and large, though, most stocks of established companies like those that make up the S&P 500 make measurable gains in timeframes measured in years (or even decades), rather than in weeks or months. Given enough time, the S&P 500's average annual gain is right around 10%.
In fact, let's use that average gain to figure out just how quickly a stash of $100,000 could become $1 million. As the graphic below illustrates, reinvesting any gains and dividends paid by an S&P 500 index fund into more shares of that fund would lead you to the $1 million mark in roughly 25 years.
Data source: Calculator.net. Chart by author.
The key here is compounding. That's just the mathematical term for putting your past gains back to work in the stock market. While the growth of this portfolio starts out seemingly slow, things really start to perk up around the 10-year mark. That's when your average annual gain is literally twice as big as your first year's average likely gain. In the 25th year of this 25-year span, that year's gain is literally as big as your initial $100,000 investment.
But you don't have $100,000 to invest or 25 years until you retire? That's OK. You may or may not become a millionaire, but you can still do something to put yourself in a better financial situation in a distant future. Even if you can only add $5,000 to a retirement account every year for 30 years, if you contribute that money faithfully and keep it invested in equities, you'd still end that 30-year stretch with over $900,000 on your $150,000 worth of input. Not bad.
Data source: Calculator.net. Chart by author.
Again, most of your overall net gain takes shape in the latter one-third of your growth/accumulation period. It just takes the first two-thirds of your growth phase to build up enough savings and net growth to start that last third with a meaningful amount of money.
It's this seemingly slow start that causes too many people to get discouraged too early on.
Plan now for the unknown then
There are a couple of footnotes to add to the illustrations above.
First, the examples used an average market gain of 10%. While this is an accurate figure, bear in mind it's only an average. Some years will be better. Some will be worse. Some years will even be losers. You should give the stock market at least five years to reasonably expect your net returns to match the S&P 500's average annual return.
Second, you probably won't want to be fully invested in the market right when you retire, since it could be a down year. You should start shifting away from assets with volatile values about five years before you start drawing funds out of your retirement savings, putting those funds into something with a more reliable value like bonds. This could crimp your overall potential upside (although it may actually improve your potential long-term returns).
Even so, stocks remain your best option when it comes to growing enough savings to retire as comfortably as you're living while you're working and earning an income. The key is sticking with this plan even when it's uncomfortable to do so.
