It’s becoming more difficult to save a sufficient amount for a comfortable retirement these days because of increasing inflation, health care costs and other factors. A recent retirement survey by the Employee Benefit Research Institute (EBRI) showed that about 70% of current retirees wished they had saved more or invested earlier.
Investing for retirement might seem daunting, but the biggest difference between a comfortable retirement and barely scraping by is time.
How Investing Early can Make a Huge Difference
Investing early can mean the difference between tens, if not hundreds of thousands of dollars long-term because of the power of time.
Let’s look at this example below:
Investor A starts investing $1,800 per year into an IRA at age 25. They start out with $5,000 and earn an average return of 7%.
Investor B contributes the same amount, has the same starting balance and an average return of 7%. But they start investing at 35.
When Investor A turns 65, they will have $434,215.49 in that IRA. Investor B will have just $208,090.69 at 65.
This example shows how waiting 10 years can potentially cost you a lot.
You also don’t need tons of money to start investing.
With apps like Acorns, you can invest the spare change from everyday purchases into a well-diversified exchange-traded fund (ETF) portfolio. Even just investing $5 per day or $1,800 per year can go a long way.
Another way to make it easier to start investing earlier is by working for a company that provides a 401(k) match. With this benefit, an employer will match your contribution up to a certain percentage.
An employer that offers 100% up to the first 6% will match your 401(k) contribution dollar for dollar up to 6% of your paycheck.
Dollar Cost Averaging
Aside from delaying investing, one of the biggest mistakes investors make is being overly emotional when investing. That behavior can make it easy to buy investments at high prices to only sell them at lower prices during down markets.
However, the stock market increases over the long term. For example, the S&P 500 has returned 10% per year on average since 1926.
Instead of panicking or trying to time the market, you could use dollar cost averaging to invest the same dollar amount despite the share price.
For example, you invest $100 per month into an S&P 500 index fund when it's trading at $50 per share, letting you buy two shares.
If the price increases to $100, then you’d buy the same dollar amount, but receive just one share. If the price decreases to $10, then you’d get 10 shares with your $100 investment.
In the long run, this practice lowers your average cost per share, increasing your total return.
While this example doesn't reflect the actual prices of index funds, it shows that dollar cost average investing can help you stick to a plan and invest with logic, not emotion.
Looking for ways to boost your returns? Check out Benzinga's coverage of Alternative investments:
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It’s no secret that some retirees and investors are struggling. High inflation, increasing volatility and a bear market are adding fuel to the fire. Things might seem bleak, but the biggest factor that leads to a successful retirement is time.
Investing early and dollar cost averaging can help you ride out volatile markets and keep your emotions in check. Most importantly, these basic strategies can help you reach the goal of spending your golden years living your best life instead of barely surviving.
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© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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