A simple trick will help you increase your retirement savings exponentially. Something that grows exponentially is something that grows very fast. The concept of the exponential must be clearly understood if one is thinking about starting or increasing their retirement savings.
Like any type of savings, retirement savings grow more the longer you let it save and the longer it is earning interest. If your money grows enough, you will have the means for a comfortable retirement, and for this you should start as soon as possible.
You don’t need to be an investment expert to enjoy the benefits of saving for retirement. The key to accumulating enough savings for good golden years does not lie in finding magical hidden investments or with very high returns, because those could be too risky if you are starting out in this world. The simple trick is to harness the power of long-term investing and compound interest. A passive approach works perfectly if you understand and handle it well.
Diversification of Retirement Savings
Let’s imagine a hypothetical scenario where a saver started on January 1, 2000 with $200 and added $200 every month until January 2035, when the full retirement age (FRA) of this fictional person and 35 years of contributions are simultaneously fulfilled. With an imaginary annual interest rate of 7%, which would be a good possible number, he would have saved about $411,642.11 for his retirement. Not bad, right?
Investing in the stock market can be an effective and bold way to boost your saved money so that it yields more, but like any investment, it has its risks. Using an approved passive investment strategy, as in the example of the $200 invested monthly that we mentioned, can be a way to increase your retirement wealth.
Moreover, let’s imagine that instead of $200 you invest $100 per month between January 2000 and December 2023. It could total $77,869, based on the 7.5% annual average return of the S&P 500 index, which includes the 500 largest U.S. companies. If you keep investing more years, your little pot of gold will keep growing until you start enjoying it.
Passive Investment Strategies Could Be Good For You
Exchange-traded funds (ETFs) such as the Vanguard S&P 500 are ideal for those who prefer not to actively manage their investments. ETFs require minimal effort and, by diversifying your investments into a wide range of companies, they mitigate the risk associated with individual stocks and capture the overall market growth, even if it is not guaranteed. If the market goes down, and you don’t have time to recover before you need your money, that can be a problem.
ETFs are also known as trackers or index funds, and combine several features of traditional mutual funds with stocks. They work similarly to stocks since they can be bought and sold on the stock market throughout the day, and you can hold them from one day to months or years, depending on what you think is relevant with the appropriate advice.
Unlike traditional stocks that represent the ownership of a single company, ETFs replicate a specific market index, such as the S&P 500 or the IBEX 35. This means that by investing in an ETF, you are investing in a pool of shares of different companies within this index.
Advantages of ETFs for Retirement Savings
These types of investments can be an excellent tool for retirement savings for several reasons. First, because they diversify your investment in a wide range of companies, which reduces individual risk. Secondly, because they are low-cost since they have lower management fees than traditional investment funds, which means that your money is going to be “liquefied” much less due to the lower fees.
Transparency is another great advantage of ETFs because the compositions of them (which companies they contain) and their returns are published daily. Flexibility is the last of the points in favor of ETFs because you can buy and sell easily, which helps you adjust your investment portfolio according to your needs and economic possibilities.
