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:
|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%|
|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%|
|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|
|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.