If You’re Unprepared for Retirement… Do This NOW!
I recently came across some disturbing figures in my research.
American retirees are among the least prepared when it comes to how much they have saved.
Just look at how Americans stack up against retirement savings in other countries.
As you can see, the difference between what retirees have saved and how much they’ll actually need in retirement is in the TRILLIONS of dollars.
And this gap is expected to increase dramatically over the next 30 years.
Hopefully, you’re a bit more prepared than the average retiree.
But if you find you have less socked away for retirement than you would like, I’ve got an idea for you today that should help boost your retirement income and stretch your savings.
Albert Einstein is reported to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”
To be sure, compound interest is the concept at the heart of how investments work. And there is no other force quite as powerful to help you grow and preserve your retirement savings.
The term “interest” is pretty easy to understand. It’s the extra income you get paid for investing your money.
If you invest in a savings account, you’ll typically get a guaranteed rate of return from the bank that you’re depositing the money with. In today’s environment, that amount is pretty small. But at least it’s an amount that you can reasonably count on.
For retirees that need more income from their savings, I’m a big fan of high-quality dividend stocks. When you own a share of stock, you literally own a piece of a corporation. And dividend stocks generally pay you a portion of their earnings every quarter — in cash!
That cash dividend payment is essentially like an interest payment on your investment. And if you choose wisely, that interest payment will give you much more cash than you’d receive from a savings or other bank account.
So that’s the concept behind interest. But how do we get to compound interest?
Simply put, compound interest is the interest you receive on your previous interest payments.
For example, if you received a 5% dividend — or interest payment — on an investment of $100, the total value from your investment would be $105.
Now, if you reinvested that $105 into the same opportunity, your next 5% dividend would not be $5.00. Instead, it would grow to $5.25.
That extra $0.25 is compound interest. It’s the extra interest you’re earning from reinvesting your first interest payment.
An extra $0.25 may not seem like much. But if you’re investing a larger amount, that extra compound interest can represent a much larger number. And over time, that compound interest really adds up!
In fact, over a period of several years, compound interest can more than double or triple the amount of wealth you generate, simply because you reinvested the new cash instead of spending it.
Automatically Reinvesting for Compound Interest
Did you know that most high-quality dividend stocks make it extremely easy to build compound interest with your investment?
The process has been designed so that your dividend payments are automatically reinvested to give you as much compound interest as possible.
This type of program is called a Dividend Reinvestment Program — or DRIP.
With a DRIP, every time your stock pays a dividend, your cash will automatically buy new shares of stock. In some cases, a company will even allow fractional share purchases. So if your dividend payment doesn’t quite buy a full share of stock, you can still own half a share or some other portion.
This way, your wealth grows more quickly because you’re constantly adding to your number of shares, leading to bigger dividend payments quarter after quarter.
DRIPs can be set up through your brokerage account in most cases. Although brokerages often charge a small fee for managing these programs.
If you want to avoid the fee, you can go to the investor relations site for most high-quality dividend stocks and look to see if they have their own corporate DRIP program. If so, you can invest directly with the company so that you’re able to avoid the fees and continue to grow your position as new dividends buy new shares.
One of the things that I like most about DRIP programs is that you don’t have to be disappointed when your stock pulls back.
Pullbacks in stocks are just part of the market’s natural ebb and flow and even the best stocks don’t trade higher every single day.
But when you’re using a DRIP program, a pullback in a stock’s price can actually help you build wealth faster!
Because when a stock is priced lower, your dividend can naturally buy more shares. And that means your next dividend payment will be even higher because you’ve got more shares than you would have owned if it weren’t for the pullback.
If you’re not sure that you have enough cash set aside for retirement, I’d encourage you to consider a DRIP program with a portion of your investments. This way, you can continue to grow the income you’ll receive over time, and that will help to stretch the number of years your retirement can pay for.
Here’s to growing and protecting your wealth!