Can you come up with $10 a day? If so, you can potentially retire with over $2.7 million dollars to your name. That’s what you would wind up with if you invest $10 a day for a 45-year career at a 9.5% annual rate of return. Given that that rate is about the level of long-run returns the stock market has provided over the decades, it’s in the realm of possibility. Even if the market in the future delivers returns at around a 7% annualized rate, $10 a day for 45 years would still turn into over $1 million.
Of course, if it were that easy to retire rich, everyone would be doing it, and we would not be in a situation where more than 40% of Americans are in danger of retiring broke. So clearly it takes more than a few bucks a day to wind up comfortable in retirement. While it’s not rocket science, it does take effort and planning. These five secrets will help you improve your chances of retiring rich, even if you’re starting from ground zero today.
1. Start early — today if possible
Time is the ally of the young investor and the enemy of the older one. To get to that same $2.7 million level at retirement, an investor with only 15 years left to retirement would need to sock away around $225 per day. That’s far more than the $10 someone fairly young would need to come up with, and it’s really achievable only for the highest earners among us.
To be frank, even a high earner isn’t likely to be able to go from nothing to socking away the $6,750 per month indicated by that $225 per day. When you’ve got the income, it’s easy to get trapped in a high-cost lifestyle that ultimately keeps you from saving. So starting early not only means you can build wealth for less outlay each month, it also means you get that much more of your money working for you instead of trapping you in your lifestyle.
2. Make investing for your future a priority
That daily investment target? That really is the amount you need to sock away each and every day in order to have a chance at winding up with a substantial pile of money in your golden years. That includes weekends, holidays, vacations, sick days, and all the other curveballs and important milestones life throws your way.
For your money to compound on your behalf, you have to put it to work for you. You have to recognize, for instance, that your retirement is a bigger financial priority than your kids’ college educations. You have to be willing to drive around in a reliable older vehicle instead of sporting a brand-new ride. It’s perfectly fine to spend some of your money on other priorities and on enjoying the finer things in life, but if you don’t make investing for your future a priority, you won’t build real wealth.
3. Take advantage of all the free money you can
If you invest in a tax-advantaged retirement account, Uncle Sam will let you defer your taxes on your returns. In addition, you may be able to either contribute pre-tax money in a traditional-style plan or withdraw your money completely tax-free in retirement in a Roth-style plan.
On top of the money Uncle Sam offers you for contributing toward your retirement, your boss may also offer you money to contribute to your employer-sponsored retirement plan. 401k matches are very common, with a typical match being 50% of whatever you contribute up to some percentage of your total salary. Whether the money comes from you, your boss, or Uncle Sam, once it’s in your account, it’s compounding on your behalf, getting you that much closer to your goal.
4. Keep your costs low
The stock market may have historically delivered returns around 9.5% annually, but that doesn’t mean the typical investor received those returns. Indeed, mutual fund investors often substantially trail the overall market’s returns. Much of that can be traced to the high costs of running actively managed mutual funds. With research costs, the churn costs of heavy trading, and marketing charges, the money investors pay to hold those funds add up, taking away from those investors’ returns.
Instead focus on a long-term, low-cost strategy. One of the best available to most people is dollar-cost averaging into low-cost index funds. Index funds are generally passively managed, meaning they pay a lot less in overhead and research costs. They also tend to trade a lot less, keeping the churn costs of investing down. Those lower costs help assure more of the market’s returns end up in your pocket — instead of getting lost to charges associated with managing your money.
By making regular contributions — or dollar-cost averaging — into those funds, you buy more shares when the market is lower and fewer when the market is higher. That’s one of the best methods available for ordinary investors to come close to the old market maxim of “buy low, sell high.” Keep it up throughout your investing career, and you increase your chances of actually getting market-like returns on your hard-earned money.
5. Focus on the long term
While the overall stock market has been an incredible creator of wealth over the long term, the day-to-day and even year-to-year returns are not guaranteed. The market can, and will, go down. For investors with a long-term perspective, market corrections are a great time to buy more shares. Without that long-term perspective, it gets easy to panic-sell into a declining market, effectively “buying high and selling low” — the exact opposite of what you really want to do.
The reality is that even once you’ve retired, you may very well have decades ahead of you. While retirees and near-retirees will likely want some money in more conservative assets like bonds, with a time frame measured in decades, there’s still a need to keep money with a long-term focus. As a result, not only should stocks and stock index funds play an important role while you’re saving for retirement, they should also play a role (albeit a slightly different one) in getting you through retirement.
