Once you reach retirement, you may end up needing more income than expected. That’s because some of your costs, like healthcare, could rise as you age, while others may not drop the way you expect them to.
It’s for this reason that saving independently for retirement is so important. If you rely too heavily on Social Security, you could end up pretty cash-strapped.
Of course, building a solid nest egg might seem like a challenge. But here’s one way to make it easier – invest your money savvily. In fact, if you play your cards right, you can triple your retirement plan contributions and amass a nice sum of money in time for your senior years.
Seamlessly grow your wealth
The great thing about investing is that it allows you to take money you’re not using and turn it into a larger sum. As you put money into your IRA or 401(k) plan, you should invest it with the goal of snagging as high a return as possible without taking on undue risk.
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To this end, loading up on stocks during your working years and shifting toward bonds as retirement approaches is a good bet. Bonds are a poor investment choice for your 30s and 40s because the returns they deliver may not be enough to grow your nest egg substantially over time. Stocks are, of course, riskier, but if you go heavy on them during your 30s, 40s, and even 50s, you’ll have the option to scale back as retirement nears.
Now, let’s assume you’re able to sock away $200 a month in a retirement plan over a 30-year period. Let’s also assume that during that time, your investments generate a 7% average annual return. That 7% return is a bit below the stock market’s average, and it also accounts for the fact that you may not hold such a large stock position in your retirement plan during your last few years of savings.
If you save $200 a month over a 30-year time frame, you’ll end up contributing $72,000 to your savings out of your own paychecks. But with that 7% return, you’ll end up with about $227,000 in your nest egg after three decades. That’s a little more than triple the amount you put in.
Now, watch what happens if you only score a 4% average annual return in your retirement plan because you stay away from stocks and load up on bonds. Assuming the same monthly contribution and savings window, you’ll be looking at about $135,000. That’s a …….