Written by Puja Tayal at The Motley Fool Canada
Retirement has become a financial stress rather than a long vacation everyone dreamed of. BMO’s 15th annual Retirement Survey found that 63% of Canadians are worried that rising inflation is affecting the money they set aside for retirement savings. Come to think of it, we often put retirement plans on the back burner to meet the current financial challenges.
We think we will catch up on the missed savings next year or maybe the year after. By the time we pump up the retirement pool, it is too late, and we have lost the benefit of compounding.
To give you a gist of the power of compounding, I plugged a few numbers into an investment calculator, and the math was shocking. A $1,000 annual investment for 40 years can earn you almost three times more money than a $1,000 annual investment for 30 years, assuming a 12% annual return.
|
Investment Horizon |
40 Years |
30 years |
|
Annual Investment |
$1,000 |
$1,000 |
|
Annual return |
12% |
12% |
|
Invested Amount |
$40,000 |
$30,000 |
|
Portfolio value |
$849,172 |
$267,082 |
The opportunity cost of 10 years of procrastination is significant in compounding because it reinvests the interest to earn more interest.
“Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” – Albert Einstein.
Coming back to the root cause of the problem, inflation is eating up the money allocated for retirement. The survey found that Canadians are:
-
Reducing their retirement savings, some even putting them off completely,
-
Cutting down on spending to maintain savings,
-
Or working longer to earn more.
Increasing income and cutting spending can help you stay on target, but it may not tackle the situation.
Inflation is a reality, and your investment strategy needs to adapt to this reality or risk becoming obsolete. Term deposits, while safe, cannot help you fight inflation. Dividend stocks paying static dividends for years cannot address the inflation reality. Your retirement portfolio needs stocks that grow and also pay income.
You may not have the luxury of 40 years until retirement. However, you can reduce the opportunity cost of lost time by increasing the invested amount and portfolio returns.
This $6,000 investment strategy will divide your investments into growth and dividend-growth stocks. The investment timeframe would be 20 years.
Topicus.com (TSXV:TOI) is following in the footsteps of its parent Constellation Software and efficiently compounding its business. Topicus.com acquires vertical-specific software companies in Europe and uses the cash flow from acquired companies to buy more such companies. Every new acquisition builds on the size of the company and increases the value of its shares. The growing-through-acquisition strategy has increased its share price by 52% in a year.
link
