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How Small Investments Can Grow Into a Large Retirement Nest Egg

Updated on September 27, 2018
Rock_nj profile image

I enjoy writing about ways to make money, save money, and use money wisely.

Retirement Nest Egg

Small Investments Over 40 Years Can Grow Into a Large Retirement Nest Egg
Small Investments Over 40 Years Can Grow Into a Large Retirement Nest Egg | Source

When Individual Retirement Accounts (IRAs) became a long-term retirement investment option in the United States, as part of the 1986 Tax Reform Act, many proponents predicted it would result in numerous people becoming millionaires by the time they reached retirement age. It may be hard to believe, but those predictions are entirely correct, as long as the maximum $3,000 per year contribution to an IRA is made each year and the money is invested in dividend paying stocks that provide high rates of return. Even relatively modest contributions of $50 per month ($600 per year) to an IRA can grown into a considerable retirement nest egg over a lifetime of working. The likely investment returns that can be earned by making long-term investments are not wishful thinking, they are based on historical stock market returns and hard math.

An Example Regarding How IRA Investments Can Turn Into More Than One Million Dollars

The stock market has historically returned approximately 9% on average per year when stocks are held over long periods of time. This average annual return includes both nominal stock price gains and dividends paid based on stock ownership (receiving stock dividends is the key to increasing stock market returns). It is important to note that the stock market is highly volatile and 9% annual returns do not occur every year, with some years well below or above this average, and some years experiencing losses. To capture the average 9% annual stock market return, an investment portfolio needs to be continuously invested in the stock market to ensure the above average years’ gains are captured and invested in dividend paying stocks to capture the additional returns provided by stock dividends. Dividends on stocks should be reinvested in the stocks to maximize long term gains.

Investing $3,000 per year in dividend paying stocks via an Individual Retirement Account (IRA) for forty years would turn into $1,104,875 at a 9% annual rate of return that is compounded annually. That would be $120,000 invested over forty years that turns a retiree into a millionaire with a $1,104,875 in their Individual Retirement Account (IRA). The total amount could be even higher, if dividends from dividend paying stocks are reinvested.

An Example Regarding How Small Investments Grow Into a Nice Retirement Nest Egg

Since $3,000 per year may be too much for many middle income people to set aside and invest each year for retirement, it is important to understand that even small investments in dividend paying stocks of $50 per month ($600 per year) can turn into a sizeable $220,975 retirement nest egg over forty years. That is $24,000 invested over forty years turned into $220,975 by the time one is ready to retire. This calculation assumes a 9% annual rate of return from stock investments that is compounded annually. The key to achieving such large gains from small monthly investments is to keep the money invested in the stock market during its ups and downs to capture the years with above average returns and invest in dividend paying stocks to the receive the additional returns provide by stock dividends.

It Is Important To Take Actions To Hold Onto a Retirement Nest Egg

A critical retirement investing error that too many investors make is keeping their retirement nest egg in the volatile stock market after they retire. The stock market has experienced two significant meltdowns since the year 2000, and some retirees lost a considerable amount of money during these steep stock market selloffs. It is important to shift money out of volatile stocks upon retirement or ahead of retirement to ensure that a retirement nest egg retains its value and is available during retirement. Financial advisors often suggest shifting money from volatile stocks to safe interest paying financial instruments, such as investment grade bonds, government bonds, or annuities. The key to investing during retirement is to hold onto investment gains made over a lifetime of working and use a retirement nest egg to provide income that is needed during retirement.

Disclaimer: This article was not written by a financial professional or a registered financial advisor. This article is for informational purposes only, and is not intended to be solicitation or recommendation to purchase stocks or any financial products. Please consult a registered financial advisor to ensure you understand the risks and rewards associated with buying and selling stocks and other financial products.

What is an IRA? Traditional IRA vs Roth IRA vs 401K

© 2013 John Coviello

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    • Entourage_007 profile image

      Stuart 

      6 years ago from Santa Barbara, CA

      Very helpful article, you have so many great articles that relate to investing and that is one area that I am trying to learn more about. Great ARTICLE!

    • WalterPoon profile image

      Poon Poi Ming 

      6 years ago from Malaysia

      A very analytical hub! The power of compound interest is indeed mind-boggling. Rock nj, you remind me of the mistake that I made when I was much younger. My parents hardly went to school but they kept telling me what you said. If they had shown me the analysis that you have done, I would possibly have avoided my mistake, LOL. Voted up with UABI.

    • Rock_nj profile imageAUTHOR

      John Coviello 

      6 years ago from New Jersey

      Thanks for the feedback everyone. I'm glad you found this Hub helpful and learned something. I did not go into any details regarding Individual Retirement Accounts (IRAs) in this Hub. I was just trying to demonstrate how small investments over time can grow, if they are done consistently and properly invested. There is a lot to learn about IRAs, as there are a few different types of IRAs with different tax implications both now and at the time of retirement.

    • mailxpress profile image

      Michelle Cesare 

      6 years ago from New York

      I need to put a plan into action and start to plan more seriously for my future. As per usual, I learned something new.

    • mylindaelliott profile image

      mylindaelliott 

      6 years ago from Louisiana

      Thanks for the tips and advice. It's so hard to get younger people to understand this.

    • DDE profile image

      Devika Primić 

      6 years ago from Dubrovnik, Croatia

      You shared great advice on How Small Investments Over 40 Years Can Grow Into a Large Retirement Nest Egg, most informative and a good learning hub

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