In these times of economic uncertainty many people are concerned about paying for their retirement. Pensions and Social Security are becoming less of a certainty. Most of the burden is being shifted to the individual in the form of Individual Retirement Accounts and 401k plans. As daunting as the prospect of saving for a retirement that could last over 30 years may be, you do have a powerful weapon on your side. It is the power of compounding stock returns.
The power of compounding stock returns occurs over long periods of time; call it a get-rich slow [http://finance.stressfreetrading.com/] strategy. Such a strategy rejects chasing after the latest financial fad, instead deciding to make investments that slowly but surely increase in value. You add to these investments regularly, such as by investing the same amount every quarter or using a 401k to invest with each paycheck, and reinvest dividend and capital gains income (thus adding to your principal).
You need to start saving when you are young to take maximum advantage of compounding stock returns. The following example illustrates this point. Let us say that two people both want to start saving for retirement- the first starts saving $2000 per year at 19, while the second saves nothing until the age of 27. Assuming a 10% annual return in a tax-deferred account, the first person would have accumulated a nest egg of $25,199 by the age of 26, while the second person has yet to save a dime.
The power of compounding stock returns [http://finance.stressfreetrading.com/] from a young age can be illustrated by the following scenario: Let's go back to our friends, Bob and Ted. Just when Ted is starting to save $2000 a year, Bob is laid off and stops investing. Even though Ted invests at this rate until retirement and Bob never invests another dime, Bob will have more money at age 65 than Ted. Bob, who invested $16,000 over a 7 year period, will have a total investment of $1,035,161. Ted, on the other hand, who started investing later and paid in $78,000 over 39 years will only realize $883,185. Clearly it's better to start saving early in life.
The key to understanding how this is possible is that at age 26, our first person will actually earn more on his investments than he or his counterpart will add to their portfolios. He will continue to make money [http://finance.stressfreetrading.com/] every year on these investments. Despite continued investing the second person will never catch up.
It is necessary to ensure that all investment income is invested elsewhere. Principle or income are not to be spent. There is more fun in saving money than in spending but the power of compounding stock returns is an easy path for your retirement security.
The power of compounding stock returns occurs over long periods of time; call it a get-rich slow [http://finance.stressfreetrading.com/] strategy. Such a strategy rejects chasing after the latest financial fad, instead deciding to make investments that slowly but surely increase in value. You add to these investments regularly, such as by investing the same amount every quarter or using a 401k to invest with each paycheck, and reinvest dividend and capital gains income (thus adding to your principal).
You need to start saving when you are young to take maximum advantage of compounding stock returns. The following example illustrates this point. Let us say that two people both want to start saving for retirement- the first starts saving $2000 per year at 19, while the second saves nothing until the age of 27. Assuming a 10% annual return in a tax-deferred account, the first person would have accumulated a nest egg of $25,199 by the age of 26, while the second person has yet to save a dime.
The power of compounding stock returns [http://finance.stressfreetrading.com/] from a young age can be illustrated by the following scenario: Let's go back to our friends, Bob and Ted. Just when Ted is starting to save $2000 a year, Bob is laid off and stops investing. Even though Ted invests at this rate until retirement and Bob never invests another dime, Bob will have more money at age 65 than Ted. Bob, who invested $16,000 over a 7 year period, will have a total investment of $1,035,161. Ted, on the other hand, who started investing later and paid in $78,000 over 39 years will only realize $883,185. Clearly it's better to start saving early in life.
The key to understanding how this is possible is that at age 26, our first person will actually earn more on his investments than he or his counterpart will add to their portfolios. He will continue to make money [http://finance.stressfreetrading.com/] every year on these investments. Despite continued investing the second person will never catch up.
It is necessary to ensure that all investment income is invested elsewhere. Principle or income are not to be spent. There is more fun in saving money than in spending but the power of compounding stock returns is an easy path for your retirement security.