It doesn’t take an insanely complicated strategy to build a decent nest egg.
There’s a simple, nine-word blueprint that serves as the core of many successful retirement investing strategies. Those nine words are as follows:
- Spend Less Than You Earn
- Invest The Rest
- Repeat
If you start following that blueprint early enough in your career and keep it up consistently, it’s fairly straightforward to wind up a millionaire — or better — by the time you retire.
Here’s what’s possible with time and consistency
This table shows how much you need to sock away every day to wind up a millionaire, starting from scratch, depending on how much time you have until you retire and what rate of return you earn.
| YEARS TO GO | 10% ANNUAL RETURNS | 8% ANNUAL RETURNS | 6% ANNUAL RETURNS | 4% ANNUAL RETURNS |
|---|---|---|---|---|
| 45 | $3.08 | $6.16 | $11.84 | $21.70 |
| 40 | $5.12 | $9.32 | $16.40 | $27.71 |
| 35 | $8.53 | $14.19 | $22.93 | $35.85 |
| 30 | $14.36 | $21.86 | $32.54 | $47.21 |
| 25 | $24.50 | $34.30 | $47.19 | $63.75 |
| 20 | $42.87 | $55.42 | $70.82 | $89.37 |
| 15 | $78.66 | $94.43 | $112.56 | $133.22 |
DATA SOURCE: AUTHOR. ASSUMES 365.25 DAYS PER YEAR BECAUSE OF LEAP DAYS.
While stock market performance is never guaranteed, over the long haul, the US stock market has delivered returns that average out around 10% annualized. If future returns deliver close to those past levels, people who start down this journey early in their careers have an incredibly straightforward path to millionaire status.
Take a look at what happens the farther down that table you get, though. As your time to retire gets shorter, you need to start socking away more. Indeed, you quickly reach the point where even with strong stock market returns, you’ll have to sock away more each day than you would have by starting early with more modest market performance.
That’s the power of that ninth word in the blueprint: “repeat.”
Investing doesn’t have to be difficult
As for how to invest that money, one of the most straightforward ways to invest is also one of the most powerful: buy an index fund.
Over the long haul, low-cost, broad-based index funds will likely beat out funds actively managed by Wall Street’s best and brightest. This effect is so strong that Warren Buffett, easily among the world’s greatest investors, won a $1 million bet that an index fund would beat a basket of hedge funds over the course of a decade.
One of the key reasons why indexing tends to win is the fact that it’s cheaper to buy and hold a broad basket of stocks than it is to actively research and trade in and out of companies’ shares. Indexes don’t have to pay the research costs associated with picking stocks, nor do they have to pay the higher friction costs (commissions, fees, and bid-ask spreads) associated with frequent stock trading.
Actively managed funds have to overcome those overhead and friction costs — with the bills generally being paid by the assets of the fund itself — before they can even start competing with index funds. That structural overhead translates to a performance penalty that gives indexing an edge.
The toughest part — getting started
Of course, for most folks who haven’t yet started investing, the toughest part of this blueprint comes from those first five words: “Spend Less Than You Earn.” On that front, a smart debt reduction strategy can help you free up cash that you can then put to work investing.
The most efficient debt reduction strategy is known as the debt avalanche method. To execute that approach, you line up all you debts in order from highest interest rate to lower interest rate. On all but your highest interest rate debt, you pay the minimums. On that highest interest rate debt, you put every penny you can, above and beyond the minimum, toward getting it paid off faster.
Once that debt is completely paid off, take the money you had been paying toward that debt and instead put it toward your new highest interest rate debt. Repeat that process until you’re either debt free or the debts you have left are in control.
Your remaining debts are in control if all of the following are true:
- The interest rate is low enough that you can reasonably expect to beat it over time by investing.
- The payment is low enough that it doesn’t crimp your ability to live a modest lifestyle.
- The debt was driven by a key purpose that benefits your future.
Make it a reality today
Those nine words — spend less than you earn, invest the rest, repeat — form a powerful foundation of a strong retirement investing plan. Yet as powerful as they are, that table makes it clear that that the sooner you get it in place, the more straightforward your path will be to a potentially financially comfortable future.
So make today the day you take those all-important first steps toward getting your debts under control. Once you’re firmly on the path to a financially stronger future, you’ll likely be very glad you did.