MoneyUnder30.com
Simple. Honest. Personal finance.
MoneyUnder30.com

How Investing Just $50 a Month can Kick-start Your Retirement

What effect could just $50 a month have on your life savings? More than you think. Here’s how to start or build upon your investing plan by making regular monthly investments (with as little as 50 bucks).

Investing just $50 a month can help you retire.The story of the tortoise and the hare is particularly applicable as an investment metaphor. Instead of trying to time the market and buying stocks that could either make you a fortune or lose you everything, a far more lucrative option is just to set a steady course and automatically buy a set amount every month.

Although Wall Street seems like a place you can only enter with an absurd amount of money, you can actually do it for as little as $50 a month.

You might have heard of this strategy before – it’s called dollar cost averaging.

The idea is that you buy an investment — say, a mutual fund — for $50 a month, every month no matter what. Whether the fund is up or down is irrelevant because you buy on schedule. This way you don’t worry about market timing, and you let the law of averages propel you to investment gains.

How dollar cost averaging works

As the mutual fund increases in value, your $50 purchases fewer shares. And when the fund loses value, you end up with more shares for the same amount. For example:

  • September buy $50 of XYZ Fund at $25 per share. Total = 2 shares at $50
  • October buy $50 of XYZ Fund at $30 per share. Total = 3.67 shares at $110
  • November buy $50 of XYZ Fund at $15 per share. Total = 7 shares at $105
  • December buy $50 of XYZ Fund at $25 per share. Total = 9 shares at $225

You can see the beginning and ending value of the XYZ Fund is the same at $25 a share, but because we bought a steady amount every month no matter what the fund’s value was, we ended up actually gaining $25 in the process.

You might say, “That’s great and all, but what’s $50 a month really going to do in the end?” The answer: A lot.

How just $50 a month adds up

The power of compounding interest cannot be understated. The more time you allow your investment to grow without making a withdrawal, the more this effect can be seen.

If you stashed $50 a month under your mattress for 30 years, you would end up with $18,000, but if you invested it and earned just 5 percent, you would end up with almost $40,000 – at 8 percent, that figure becomes $68,000.

Look at the following retirement data as compiled by Statistic Brain:

Retirement Statistics Data
Average retirement age 62
Average length of retirement 18 years
Average savings of a 50 year old $43,797
Total cost for a couple over 65 to pay for medical treatment over a 20 year span $215,000
Percentage of people ages 30-54 who believe they will not have enough money put away for retirement 80%
Percentage of Americans over 65 who rely completely on Social Security 35%
Percentage of Americans who don’t save anything for retirement 36%
Total Number of Americans who turn 65 per day 6,000
Percentage of population that is 65 years of age or older 13%
Out of 100 people who starts working at the age of 25, by the age 65:
Will be considered wealthy 1%
Have adequate capital stowed away for retirement 4%
Will still be working 3%
Are dependant on Social Security, friends, relatives or charity 63%
Are dead 29%
Americans older than 50 account for:
Percent of all financial assets 77%
Percent of total consumer demand 54%
Prescription drug purchases 77%
All over-the-counter drugs 61%
Auto Sales 47%
All luxury travel purchases 80%

From this we see that the average amount in retirement savings for a 50 year old is only $43,797! More frightening is the statistic that shows only 4 percent of 25 year olds will have saved enough for retirement by 65.

The following table shows you that in order to receive $2,000 a month for 20 years in retirement, you will need to have saved up around $333,000. In order to achieve that, you will need to invest $250 a month for 30 years (assuming an 8 percent rate of return).

Amount Needed for Retirement by Age
Monthly income need Savings Needed for 20 Years Savings Needed for 30 Years
$1,000 $166,696 $212,150
$2,000 $333,392 $424,300
$3,000 $500,087 $636,450
$4,000 $666,783 $848,601
$5,000 $833,479 $1,060,751
$6,000 $1,000,175 $1,272,901
$7,000 $1,166,871 $1,485,051
$8,000 $1,333,567 $1,697,201
$9,000 $1,500,262 $1,909,351
$10,000 $1,666,958 $2,121,501
Assumes a 6 percent return and 2 percent inflation during retirement period.

Slow and steady wins the race

In retirement planning, slow and steady wins the race. Timing the market doesn’t pay off in the long run, but dollar cost averaging can.

Although $50 a month may not get you to retirement completely, it’s a good start. $250 a month is even better, and can get you to a minimum retirement income level of about $2,000 a month.

Every little bit helps. Keep in mind timeframes can greatly alter your retirement scenario as well. For example, if you were to invest for 31 years instead of 30 at 8 percent, you would end up with $74,000 — a difference of $5,000 for delaying retirement by just one year while only investing $50 a month.

About Daniel Cross

Daniel Cross has been in the industry as an investment writer and financial advisor since 2005. He holds the Chartered Financial Consultant designation (ChFC) as well as Series 7 and Series 66 licenses, and has embarked on the arduous journey of obtaining the coveted CFA designation. Daniel lives in Florida with his wife, daughter, and pet Tortoise ironically named Turbo.

Comments

  1. Albert Einstein called it the eigth wonder of the world…the beauty of compound interest!
    All one needs I guess is the discipline to stick to the savings throughout without dipping into them to allow the nest-egg to grow.

  2. Monique Olivera says:

    Should I be investing at betterment/Ameritrade or should I put money in an IRA account ( considering I am a self-employed freelancer with no matching benefits) ?

    • David E. Weliver says:

      I would look into funding a Roth IRA, which you can open at any brokerage like TD Ameritrade or Betterment. If you are able to/want to contribute more than the annual maximum to a Roth IRA, additional options are available to the self-employed including a SEP-IRA or a solo 401k. But don’t let those confuse you if you’re just getting started; a Roth IRA is your best bet.

  3. I’m now 28 and have no debt rent our house with my wife. We have right now about $15,000 in retirement. Which is not much but I was young and dumb. Now we sack away $416 a month into a Roth IRA. Also $500 a month into a emergency account. Not much to me but more than most. This is with my wife not working she is currently going to school still. Once she is done in about 2 months she will make around $25K a year. So we will be able to save even more soon. Than my wife will go to nursing school and once done with that way more income. It’s easy to save if you live in your means and have no debt.

  4. Starting a retirement account as soon as I got my first job out of college was probably the smartest financial decision I’ve ever made! I was fortunately able to convince my boyfriend to start his too. We’re pretty broke right now but watching our retirement accounts grow month after month is a great feeling. We’re already seeing the benefits of compounding interest! Only 40 more years to go :)

Subscribe Now

  • Sign up for our 100% free email course, Money School



    We do not share your email and offer one-click unsubscribe-- always.

    Like Money Under 30 on Facebook