You have a one in 175 million chance of winning the lottery.
Your ancestors may expect to leave you an average of $177,000 as an inheritance, but sudden catastrophes and medical expenses drop that number to about $60,000. That is, if you are fortunate enough to inherit anything at all.
The fact is, if you are looking for a sudden windfall to fund your retirement, you are setting yourself up for financial failure. Luckily, there is another way to achieve the retirement of your dreams. Better still, you don’t have to have a large sum of money to get started.
It All Starts With A Plan
How much do you need for retirement? That is a question that has a very subjective answer. In order to calculate how much money you need to save, you will have to estimate items such as the rate of inflation, how many dependents you will be supporting, and what kind of lifestyle you expect to lead. You will have to guess how long you will live and whether or not you will have any major medical problems. You can do all of the math yourself, you can use a calculator that takes into consideration how much you already have saved, or you can just assume that you will need to save $1 million dollars by the time you are 65. If you are 64 and haven’t started saving yet, you may have a problem. However, if you begin saving at age 25, it is actually achievable for nearly anyone to retire as a millionaire. But how?
The Miracle of Compound Interest
The idea behind compound interest is fairly simple. Money that is used to purchase dividend yielding stocks is not spent. It is also money that continues to grow based on both the initial amount as well as the added interest.
For example, assume that you are 25 years old and finally have a job that allows you to have some extra spending money. Maybe you eat out a couple of times per week, spending $10 each time like the average American. You probably also spend $1,100 on coffee as well. Instead, if you pack a lunch and drink your caffeine at the office, you could save much more than $2,100 per year. In fact, assuming a five percent dividend that is compounded over the course of 40 years, those lunches and coffees could equal to a whopping $265,000 by retirement age.
That figure may sound robust when compared to a cup of coffee, but it is still a significant distance from one million. However, in order to reach your retirement dreams, you could already be about a third of the way there. You will need to put away about $700 per month, or $8400 per year for 40 years assuming that you start from scratch. That is less than half of the allowable 401(k) limit set forth by the IRS. These figures assume you start with nothing. If you have any kind of money that you can invest from the outset, you can either expand your retirement plan or invest less to achieve that million dollar status.
Starting Out At 35
When you should start saving for retirement is often very different from when you actually do. According to a recent Employment Benefit Research Institute study, workers age 35 or older are more likely to save for retirement than their younger counterparts. Even those who are saving still have less than $10,000 put away. How can a 35 year old, without the benefit of time, reach that million dollar mark by age 65? Once again, compound interest comes to the rescue.
A five percent dividend that is reinvested over the course of 30 years, versus 40 years, can surpass $1 million if an individual is will and able to part with a figure close to the previously mentioned amount of retirement saving allowed by the IRS. A monthly investment of $1450, assuming no principal savings, can reach a staggering $1.2 million using modest accounting.
How Do You Save?
The next big question comes not from how compound interest works, but how to get that money to put into an investment account in the first place. Most financial experts recommend starting small. As mentioned earlier, cutting back on eating out and buying overpriced coffees will get you started. Other no-brainers like not carrying interest on credit cards, buying homes and vehicles that are within your means, and avoiding student loans should help you avoid overextending yourself. Perhaps the most important, and most difficult, is simply growing accustomed to viewing those investment dollars as a part of your future salary rather than your current one. Immediately reserving that money in a dividend yielding investment account gives you the security you need for your future without the temptation you don’t need today.