Someday, your portfolio will earn more than you do.
Sure, that day may be a long way off, especially if you've just started saving for retirement. And it may seem further away than ever after the declines of the past year.
But little by little, month after month, as you save more, your investments will earn more. As you increasingly benefit from the magic of compound interest, your portfolio value will climb higher and higher. Eventually, you'll see your account balances rise and fall with the market by amounts that represent months of pay. By then, you may wonder why you're still working at all.
In the meantime, though, there are many milestones you can celebrate along the way:
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Making your first investment. Maybe it's opening a Roth IRA account with money you make from mowing the lawn or delivering papers. Perhaps it's electing to contribute to your 401(k) in your first job. Or you might decide, with your parents' guidance, to invest in companies you know, such as Disney (NYSE:DIS) and McDonald's (NYSE:MCD) for the youngest investors, or Nike (NYSE:NKE) and Marvel Entertainment (NYSE:MVL) for the slightly older novice investor.
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When your net worth passes your annual salary. It'll take a while -- a bit less than seven years, if you can save 12% of your salary and earn 8% on your investments. But you may be able to make it happen faster, especially if you take advantage of employer matching contributions on your retirement plan.
- When your investments earn more than you save. Depending on how much you save, this may happen before or after your net worth eclipses your yearly pay. If you save 12% and earn 8%, it'll happen just a couple years later. Reaching this point may make you really take notice of the role your investments play in your overall financial planning.
And eventually, your portfolio will get really big -- between eight and 10 times your annual salary. When that happens, you'll notice that your annual earnings from your investments will sometimes be higher than the total income on your year-end pay stub from work.
With inflation hopefully boosting your pay every year, it will take decades for your investment income to catch up. But once you get there, you'll probably have enough to call your own shots.
How to get there
As Robert Brokamp, the expert in charge of our Rule Your Retirement newsletter service, says, you need to make a plan. You have to know how much you can save, and if you want to pass those milestones faster, you'll want to save as much as you can.
You also need to know how to invest in a way that balances your desire to get to the finish line as fast as you can against prudently managing the risks involved with investing. You'll need to know when growth stocks like Intuitive Surgical (NASDAQ:ISRG) are a good bet, or when value plays like UnitedHealth Group (NYSE:UNH) and American Express (NYSE:AXP) are more likely to outpace their faster-growing counterparts.
You'll find plenty of tools to help you with those tasks here at the Fool. Our Foolish retirement calculators can help you crank the numbers to see how you're doing and where you'll be in the future. Taking advantage of our free trial of Rule Your Retirement opens up a larger set of resources, from model investment portfolios designed with the aspiring retiree in mind to easy-to-read guides to getting the information you need to make smart decisions about retirement and your finances.
There are many ways to reach the goal of having your portfolio earn more than you do. But no matter how you get there, you have to start sometime. Make today the day you start down the road to ruling your retirement.
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