Nearly half of Americans nearing retirement age don’t have any savings to fund life after work. You don’t have to face such a grim reality in your 50s and 60s, though. Making the right decisions now will make it much more likely that you can enjoy your retirement instead of worrying about money. Here are 3 ways you could boost your retirement portfolio by as much as 10x.
Invest a Lump Sum Now and Watch Compounding Do Its Job
If you can afford to invest a lump sum now, you can sit back and let compounding do all the work.
What can compounding do for you?
Imagine you invest $100,000 in the S&P 500 today. Assuming that annual returns remain around 10%, your investment would exceed $1 million within about 25 years.
Ideally, you want to invest a lump sum as early as possible because each year the gains compound. Consider the growth of your $100,000 investment with a 10% annual return. During the first year, you will make $10,000. The second year will give you $11,000. Returns become much more significant as time progresses. During the 25th year assuming the same annual gain to keep the math easy, your investment would generate about $98,000.
If you can keep your money in the market for one more year, that 26th year would give you about $110,000. The returns just keep growing. The longer you can wait to withdraw your money, the more you should benefit.
Contribute a Fixed Amount Each Month for Ongoing Growth
Investing a lump sum makes compound growth possible, but you don’t need to stop there. You can grow your investment portfolio even more by committing to ongoing contributions.
Let’s say you invest a lump sum of $100,000 and continue contributing $500 per month to your investment portfolio. Over 25 years, you will invest a total of $250,000. Your portfolio will have grown to about $1.67 million during that time.
If you can afford to put an extra $500 per month into your investment portfolio, you generate more than half a million dollars in returns.
Maybe $500 per month seems out of reach for you. That’s fine. Any amount will prepare you for retirement. Perhaps you only invest $100 monthly on top of your initial $100,000 lump sum. After 25 years, you will have invested a total of $130,000. Assuming a 10% return, your investment portfolio will have a value of slightly more than $1.2 million. The small pain of contributing $100 per month means you get an additional $120,000 when you retire.
Remember that you can always revisit your investment plan to determine how much you can afford to invest each month. Some years you might contribute $100 per month because you have other financial obligations, such as buying a home or paying for your children’s education. In other years, you may find that you can afford to contribute much more.
Do your best to revisit your investment strategy as infrequently as possible. Ongoing investments tend to work best when you set an amount and let the contributions happen automatically. Ideally, you barely even notice that money gets moved from your checking account to your investment account. If you have extra money at the end of the year, you can always add it to your investments.
Reinvest Dividends To Grow Share Ownership
When you buy dividend stocks, you get to choose between taking the cash payment or reinvesting that money. Unless absolutely necessary, you shouldn’t take the cash payment until after you retire. As long as you have income, leave that money in your investment portfolio.
Dividend payouts look quite small. In most cases, you will receive less than $1 per share you own. Some stocks pay higher dividends, but that depends on company performance. Taking those cash payments now probably won’t change your lifestyle significantly. Reinvesting them, however, creates more opportunities for compound growth.
When you reinvest your payout, you get more shares in the company. As you accumulate more shares, your dividends will increase. Ideally, you want to retire with a portfolio that pays out enough to fund your lifestyle. You might not even need to sell any shares. Plenty of people live off their dividends for years.
Preparing for Retirement Doesn’t Require Much Effort
None of these strategies for growing your retirement portfolio require much effort. You just have to make a financial commitment with the understanding that investing some of your income now will lead to significant gains over time.
You don’t have to be one of those people who never get to retire. Make the right moves now so you can enjoy retirement instead of worrying about money.