Compounding Stock Returns Is The Key To A Secure Retirement

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With Pensions and Social Security becoming less and less of a feasible way to support oneself upon retirement many are looking at alternative retirement accounts as a way to survive this time of economic uncertainty. While individuals are left to sift thru many options for retirement accounts, like Individual Retirement Accounts (IRA) and 401k plans, there are other ways to plan for a retirement that could last over 30 years. Many are now looking at the power of compounding stock returns.

One of the best ways to describe the power of compounding stock returns is as a get-rich slow strategy. Instead of following the newest investment fad in the hope of good performance, you diversify and build up your investments. Any income you receive from your investments, for example, dividends or capital gains, is reinvested. One way to do this is to regularly invest the same sum of money. This could be from an IRA contribution each quarter, or a sum deducted from each paycheck and placed in your 401k.

Beginning a savings program at a young age is even more important for people who want to take advantage of compounding stock returns. Let's consider the case of two 19-year-olds, Bob and Ted. Bob has a good job and starts putting $2000 per year into savings starting at age 19. Ted, on the other hand, decides to sow some wild oats and put off saving until he's 27. Assuming that Bob makes an annual return of 10% on his investment, by age 26 he will already have saved a whopping $25,159 before Ted even gets his act together

In the first example, if you were to stop making additional investments at the age of 27, someone who just started at that age would still have less money than you, even if they invested $2000 per year for the next 39 years. You will have $1,035,161 from a $16,000 investment while the other person would only have $883,185 from a $78,000 investment. This is simply an example to illustrate the power of compounding stock returns, and should not indicate that you should not make regular investments.

To understand this, realize that a person at the age of 26 will actually earn more on their investments than their counterpart can earn from their portfolio. He can continue to make money each and every single year from these investments. The second person, despite continuing to invest, will never be able to catch up.

It is important to reiterate that all investment income is reinvested. Neither principle nor income is ever spent.

About the Author:
The power of compounding stock returns could be described as a get-rich slow strategy. Rather than chasing performance and increasing risk in the form of the latest investment fad, you add regularly to your diversified investments and reinvest any income your investments produce such as dividends and capital gains. There is a reason that this works.



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