Our tough economy is forcing people to resort to tough choices. According to a recent Time poll, 27% of Americans have taken money out of their retirement savings to cover some of their current expenses. Unfortunately, that scary move can do more long-term harm than short-term good.
The longer you leave your money alone to grow, the more powerful your compounded returns become. Check out what time, patience, and an average 10% return can do to a steady series of $10,000 annual investments:
|
After 1 year |
$11,000 |
|---|---|
|
After 5 years |
$67,000 |
|
After 10 years |
$175,000 |
|
After 15 years |
$349,000 |
|
After 20 years |
$630,000 |
|
After 25 years |
$1.1 million |
|
After 30 years |
$1.8 million |
You don't necessarily need to be a financial wizard to score those kinds of returns. Broad-market index funds, which include big companies such as ExxonMobil (NYSE:XOM) and Schering-Plough (NYSE:SGP), have thus far averaged 10% a year over the long haul. (In fairness, they could return more or less over your given investing time frame.)
You could even juice up your basic returns by adding a handful of well-chosen individual stocks to your fund foundation. The following stocks have done extraordinarily well in the past five years, while maintaining reasonable valuations and solid returns on equity:
|
Company |
P/E |
ROE |
5-year avg. annual gain |
|---|---|---|---|
|
PotashCorp (NYSE:POT) |
11 |
58% |
53% |
|
McDonald's (NYSE:MCD) |
15 |
32% |
20% |
|
Schwab (NASDAQ:SCHW) |
18 |
29% |
14% |
|
BHPBilliton (NYSE:BHP) |
7 |
40% |
28% |
|
Lockheed Martin (NYSE:LMT) |
11 |
52% |
13% |
Data: Yahoo! Finance.
But remember, those impressive gains can quickly fizzle if you start taking money out of your retirement accounts.
Suppose you take out $10,000 this year, 20 years from retirement, and you also fail to make your usual $10,000 investment. Good intentions to the contrary, you probably won't put in $20,000 next year to compensate. So you'll lose what the $10,000 you withdrew would have grown to in 20 years: a little more than $67,000. And you lose that additional $10,000 you would have invested, too: another $67,000 loss. You might pay some bills in the here and now, but your retirement could eventually end up more than $150,000 poorer. Is that worth it?
People make lots of mistakes with their retirements. Steer clear of them if you can, but if you've already made a few, take heart -- you can still salvage your retirement. A free 30-day trial to our Rule Your Retirement can give you an excellent head start.
Further Foolish tips for retirement:
