If you are like most people, your retirement accounts have much less than they should, and you are probably not even sure how to best invest the money you have in them. Let’s address those issues.
Here’s a look at how much you can accumulate – if you invest very effectively over long periods of time.
Image Source: Getty Images.
Grow your retirement accounts
First of all, know that no matter how much you have accumulated so far, if you still have some time left to retire, you can probably grow your accounts considerably. You just have to invest those dollars effectively, and it’s hard to beat the stock market for that.
View the table below and provide data from Professor Wharton Business School, Jeremy Siegel, who studied investment returns from the 1800s to recent years. He found that stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012, and in 99% of all 30-year holding periods. From his data, here are the average returns for stocks, bonds, notes, gold and the dollar, between 1802 and 2012:
|
Asset Class |
Annual nominal return |
|---|---|
|
Shares |
8.1% |
|
Bonds |
5.1% |
|
Accounts |
4.2% |
|
Gold |
2.1% |
|
US dollar |
1.4% |
Source: Long-term stocks.
If you are more interested in a more relevant investment period for yourself than 210 years, then know that the annual growth rate for equities from 1926 to 2012 was 9.6%, and that the alternatives also easily hit. That’s encouraging, but the period in which you invest may not produce such results – you can average an annual profit of 5%, an 8% one, or more or less. Let’s just go 8% for now. The table below shows how much you can regularly save different amounts over different periods:
|
Growing at 8% for |
Invested $ 5,000 annually |
$ 10,000 invested annually |
Invested $ 15,000 annually |
|---|---|---|---|
|
5 years |
$ 31,680 |
$ 63,359 |
$ 95,039 |
|
10 years |
$ 78,227 |
$ 156,455 |
$ 234,682 |
|
15 years |
$ 146,621 |
$ 293,243 |
$ 439,864 |
|
20 years |
$ 247,115 |
$ 494,229 |
$ 741,344 |
|
25 years |
$ 394,772 |
$ 789,544 |
$ 1,184,316 |
|
30 years |
$ 611,729 |
$ 1,223,459 |
$ 1,835,188 |
|
35 years |
$ 930,511 |
$ 1,861,021 |
$ 2,791,532 |
|
40 years |
$ 1,398,905 |
$ 2,797,810 |
$ 4,196,716 |
Source: Calculations by author.
The best ETF to grow your wealth
So, if your stocks are generally better, how should you best invest your hard earned dollars? Now, index funds make the most sense for most people. An index fund is a passively managed mutual fund – one that simply contains the same securities that are in a particular index. Then the returns are about the returns of the index itself – provided that its fees are low. (Many index funds sport ultra-low annual fees – often below 0.10%.)
One particularly easy way to invest in various index funds is through exchange traded funds (ETFs). They are sort of a hybrid of mutual funds and stocks, which have a variety of securities but trade like stocks – and you can buy as few or as many stocks as you want through your broker.
A prime candidate and one of the most popular index ETFs is the SPDR S&P 500 ETF (NYSEMKT: SPY), which tracks the S&P 500, an index of 500 of America’s largest companies often used as a proxy for the entire U.S. stock market. The holdings, together, form about 80% of the total value of the American market.
However, you can more than go and opt for the Vanguard Total Stock Market ETF (NYSEMKT: VTI), which aims to track the performance of the entire U.S. stock market – by including the smaller companies that are not eligible for inclusion in the S&P 500. An even broader option is the Vanguard Total World Stock ETF (NYSEMKT: VT), which includes the world stock brands.
One of these, as a combination of them, should serve you well, and grow your long-term dollars effectively.
