For many of us, life can feel like a never-ending rat-race. We work tirelessly for decades, hoping to reach the ultimate finish line: retirement. Retirement promises freedom and rest, a time when we can finally do all the things we've been putting off and enjoy the fruits of our labor. However, the key to a fulfilling retirement lies in how well we've prepared for it. One of the most important things we can do is to start investing for retirement as early as possible. In this article, we'll explore the benefits of investing for retirement and why starting now is more important than ever.
It's important to remember that the longer we wait to start investing for retirement, the harder it becomes to achieve our desired goals. The later we start our race, the faster we're going to have to run to make it to our desired finish line. With life expectancy increasing and retirement costs rising, it's more important than ever to start investing as early as possible. Even small contributions can make a big difference when it comes to retirement savings. By starting now, you can give yourself a better chance of achieving the retirement lifestyle you want without having to run faster than you can handle.
One of the great things about retirement is you can set your own finish line, as it were. Start by calculating how much you wish to spend per year of retirement. The go-to metric is that that yearly figure needs to be 4% of your invested capital. This is commonly known as the 4% rule.
The 4% rule is a commonly used guideline for retirement spending that suggests withdrawing 4% of your invested capital each year in retirement. The idea is that if you withdraw 4% of your portfolio each year, adjusted for inflation, your portfolio should last for 30 years or more, even in the face of market volatility.
The 4% rule is based on a study conducted by financial planner William Bengen in the 1990s, which found that a portfolio invested in a mix of stocks and bonds could support a 4% withdrawal rate in retirement, adjusted annually for inflation, without running out of money over 30 years. This assumes a moderate level of risk and volatility in the portfolio, with a mix of stocks and bonds.
However, it's important to note that the 4% rule is just a guideline, not a hard and fast rule. It's also based on historical market performance and may not hold true in all market conditions. Additionally, many factors can affect how much you should withdraw in retirement, such as your individual retirement goals, lifestyle, health care expenses, and other personal factors. So if I plan on spending $50,000/yr in retirement, I'll need $1,250,000 of invested capital. The next question is how to get there.
Investing for retirement can be a leisurely walk or a balls-to-the-wall sprint to the finish line, and it all depends on how early you start your regular contributions. Let's say you're a bright-eyed and bushy-tailed 18 yo with sense enough to start investing as soon as you hit the workforce, and you plan to retire at 60 yo. With a regular contribution of 180/month or ~$6/day, and getting a 10.5% return (average return of S&P 500 since its inception), you would end up at retirement with a nest egg of $1,342,379.21. And if we're going by our 4% rule, that would allow you to withdraw $53,695.16/yr for at least the next 30 years.
But maybe you weren't lucky enough to be taught this by the time you turned 18. Let's say you missed the memo by about 10 years. A 28 yo would have to put away at least $470/month or ~$16/day to get a comparable nest egg by the same age, and even then it's considerably less. A 35 yo would need to squirrel away $795/mo or ~$26.50/day, and a 45 yo needs a whopping $3,150/month or ~$105/day. All of these theoretical people have relatively the same destination. The only difference is when they started.
This is the effect of compounding interest. And the key ingredient in compounding interest is time. Compounding interest is a powerful tool when it comes to retirement planning. The idea behind compounding is that you earn interest not only on your original investment, but also on the interest that your investment earns over time. By reinvesting your earnings, your investment can grow exponentially, allowing you to accumulate more wealth and potentially retire earlier than you would be able to otherwise. The earlier you start investing, the more time you have for compounding to work its magic, so it's important to start as early as possible and to consistently contribute to your retirement savings over time.
Investing for retirement is crucial if you want to achieve financial independence and retire comfortably. Starting early, living below your means, and investing wisely can help you accumulate wealth and allow the power of compounding interest to work in your favor. Additionally, following guidelines like the 4% rule can help you determine a sustainable withdrawal rate in retirement. While the path to retirement may require hard work and discipline, it's well worth the effort to enjoy the freedom and flexibility that retirement can offer. Remember, the earlier you start planning and investing, the more likely you are to achieve the retirement lifestyle you've been dreaming of.
Comentarios