This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
It’s important to sock money away regularly for retirement. But read on to see why there’s another important step you also have to take.
Image source: Getty Images
You’ll often hear that if you don’t save independently for retirement, you’ll risk ending up cash-strapped. And that, unfortunately, is totally true.
In 2024, the average monthly Social Security benefit will be $1,907. That’s an annual income of under $23,000.
Now in time, the average Social Security benefit is likely to rise with inflation. But even so, you should expect to supplement those benefits with savings you’ve built up, whether by contributing to a 401(k) plan through your employer or an IRA.
In fact, a good bet is to allocate money to a retirement plan year after year throughout your career. But it’s not enough to simply send that money into a designated account and call it a day. You’ll also need to play an active role in investing it.
You want your money to grow
Although keeping money in cash can be lucrative today thanks to the generous interest rates savings accounts are paying, in the long run, you should be aiming for higher returns than that. That’s where the stock market comes in.
Over the past 50 years, the stock market’s average annual return has been 10%, as measured by the performance of the S&P 500. And if you’re able to snag a comparable rate on your retirement savings, you might end up with a pretty sweet nest egg by the time you’re ready to end your career.
Let’s say you’re able to save $300 a month for retirement over a 40-year period. That’s a great thing. But what you want to do during that time is also invest your money to make sure it’s growing.
Now let’s be a little conservative and say that your portfolio generates an average return of 9% over time, which is a bit below the stock market’s average. Even so, at $300 a month over 40 years, you’re looking at coming away with over $1.2 million. And that could make your retirement pretty darn comfortable.
Have a plan for your investments
Investing your retirement savings could be the ticket to growing that money nicely. But you don’t want to choose different stocks at random.
Instead, you should try to focus on companies with solid growth potential. And you can get a sense of that by reading through their financial statements and seeing how well they’re managing their cash flow and debt.
If that sounds overly complicated, here’s some really good news. You can pretty much avoid the hassle of having to research stocks individually by instead loading up on S&P 500 index funds over time.
An index fund is a passively managed fund that will aim to match the performance of the market benchmark it’s associated with. So in this case, an S&P 500 index fund would effectively invest in the same stocks as that index and most likely deliver about the same return over time.
If you’re able to commit to funding a retirement plan consistently, you’ll be doing a great service to your future retired self. But take the process one step further and make sure you’re actively investing your money. That could really set you up for the retirement of your dreams.
Our best stock brokers
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Flow. The Motley Fool has a disclosure policy.
