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The Worst Retirement Mistake You Can Make (and How to Avoid It)

Here's how to start an aggressive portfolio towards retirement

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Many people think a conservative, disciplined approach to retirement will help you reach your financial goals. They’re wrong.

If you invest too conservatively, you’ll never retire. At the same time, if you educate yourself about the financial options out there and invest accordingly, you can retire much, much earlier.

Let’s take a look at the math.

Higher Returns, Earlier Financial Freedom

In the chart above, I’ve broken down how much money you need according to how much you spend per month and what rate of return you get on your investments.

At one extreme, if you spend $1,500 per month and get a 9% annual rate of return, you need just $200,000 to retire. At the other extreme, if you spend $6,000 per month and get just a 1% return, you need over $7 million.

Look at the difference between the numbers at the bottom right and the top left. You can spend $6,000 a month and still retire on $800,000 or less if you get a 9% return, but you’ll still need well over $1 million, no matter how frugal you are, if you’re getting just 1%.

That sounds fine and good, but where can you get 9% annual returns, on average, over a long time horizon?

The answer is simple: the stock market.

The S&P 500 has offered an annualized return of more than 10% over the last 90 years. That’s including the stock market crash of 2008 and the Great Depression! Over the last 30 years, the index has offered a similar return—about 10% per year, despite downturns during three recessions:

Stock Returns Soar No Matter What

Invest $1,000 in the S&P 500, and 30 years later you’ll have over $25,000. That’s all you have to do: put $1,000 in the market. Invest $1,000 in the S&P 500 every year, and 30 years later you’ll have over $180,000.

The stock market is a powerful tool to create wealth, which is why the wealthy love it and depend on it to make them wealthier.

Still, many middle-class Americans ignore the stock market and depend on their house as a wealth builder. How does that work in reality?

Not so well. If we look at the US House Price Index over the last 26 years (when the index started), we see that prices have gone up 140.2%, but stocks outperformed real estate eightfold.

Real Estate Is a Bad Bet

Of course, even more risk-averse investors will just put their money in a savings account and sleep well at night knowing they won’t lose it.

In reality, they should be having nightmares.

Here’s why: savings accounts are earning far less than 1% a year, but let’s give these investors the benefit of the doubt and assume savings accounts will start to offer 1% returns soon. Assuming that, how long would it take to retire?

The answer is simple and horrifying: more than 100 years.

A lot more, actually.

Impossible Retirement Goals

Ultra-conservative savings and retirement do not go hand in hand. The chart above shows us that you need to get at least a 3% return on your investments to reach retirement within a lifetime. Let’s zoom in on that part of the graph.

The Secret Behind a 9% Yearly Return

The big takeaway from this chart is that you will retire sooner if you can get a higher rate of return. With a 9% return, you can get there in less than 35 years—and the S&P 500 can get you there.

So how do you do it? Let’s find out.

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Article printed from InvestorPlace Media,

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