How to Avoid Eating Cat Food at 65

Everyone wants to retire comfortably. Unfortunately most people are unable to do so, and it’s not because life is expensive (which it is). The reason most people can’t retire comfortably is because they do not start saving early enough. Few people understand how saved money grows over time, and fewer still have the discipline to save less than $5 a day.

If you would like to have a retirement nest egg of almost $400,000 by the time you reach your retirement age all you have to do is follow a few simple steps, outlined below. Anyone can do this. All you need is $25 a week and enough time to allow your investments to compound.

Source: USDA via Flickr

Source: USDA via Flickr

Today, many retirees depend on their Social Security checks in order to make ends meet. About a third of all retirees rely exclusively on the Social Security checks as their only source of income. The maximum Social Security payout (as of this writing) is $ 2,642 per month, or $31,704 annually. Without additional reserves to live on, you might find yourself living on a very tight budget. You could even end up shopping in the cat food aisle for yourself, not just for Fluffy. You don’t have to be one of those people. It is possible to retire comfortably. You don’t need a lot of money to start either. The biggest key is to start early. The more time that you have, the more your investments will grow.

Start saving money for your retirement as early as you can. The earlier you start, the more money you will have when you retire. If you think that you don’t have enough money to get started, you’re wrong. You don’t need a lot of money to invest; anyone can do this. An investment of just $25 a week could result in a retirement nest egg of over $426,000. This number doesn’t even factor in any additional savings you may have as you begin to earn a larger salary and can put more money into your retirement savings.

If a 25 year old were to invest just $25 into an S&P 500 index fund every single week for 40 years, (based upon historical averages) they would likely have over $426,000 when they turn 65.

Of course, past performance is no guarantee of future results, but over the past 100 years, the S&P 500 index has returned an average of 8.89% each year (that’s allowing for inflation and includes dividends as well).

You won’t see consistent 8+% gains each year, some years the market does quite well. For instance, over the past six years (after the banking industry crisis in 2008), the S&P 500 has returned a very healthy 15.56% (again adjusted for inflation and including dividends). However, that performance was on the heels of 2008, a year in which the market fell a jaw-dropping 37.28%.

Short time periods can show dramatic, sometimes gut-wrenching swings in the valuation of your investment, but over the long haul, the market has consistently returned about 8% or 9% annually. If you can save $25 every week and invest in in the S&P 500, in 40 years, you will likely have over $400,000.

Saving for your retirement is easy; you just need to plan for it. Almost anyone can save $25 every week. It’s easier than you think. If you are like most people, you probably spend about $5 every morning on a cup of coffee on your way to work. If you can afford $5 a day for a cup of coffee, you can afford to save $5 for your future.

Make yourself a “tip jar” for your retirement savings. Every weekday morning, before you go to work, put five dollars into the tip jar. Do this every weekday and after a year’s time, you will have saved $1,300. Take that money to your brokerage and buy $1,300 worth of the S&P index fund. Just make sure not to dip into that tip jar for other things. Once the money goes in, it doesn’t come out again until it’s invested.

To eliminate the temptation, you might be able to deposit the money into your investment account automatically. Many employers offer direct deposit into multiple accounts. If you employer offers this option, take advantage of it. Have your employer deposit $50 from every biweekly paycheck directly into an S&P 500 index fund in your brokerage account. This investment will be completely invisible to you. 40 years from now, you’ll have long since forgotten about that Vegas vacation or that shiny new gadget, and you’ll have amassed $400,000 enabling you to retire in comfort.

If you don’t already have a brokerage account, there are many worthwhile options, such as Fidelity Investments, The Vanguard Group, Charles Schwab, and TD Ameritrade, just to name a few. Many of these brokerage houses have offices in most major metropolitan areas in the USA. You could either bring the money into their office or you could use the internet to open and fund your account.

Many people might argue against putting all of your retirement eggs into one single investment. I might argue against this myself. In my book, Investing For The Rest Of Us, I outline a strategy to invest in multiple index funds. Or you can take an even simpler approach: Warren Buffett (currently ranked the third wealthiest people in the world and arguably the most successful investor in history) suggests that people might be best off by putting 90% into the S&P 500 and 10% in cash.

Invest early, invest often. Pay yourself first. Put aside as much money as you can every year. If you start early in life, by the time you reach your retirement age, you will likely have a tidy nest egg.

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