Investing early and often can be an effective way to set yourself up for a great retirement.
Living off dividend income can be a great goal to strive for in retirement. Expenses are often lower during your retirement years, and generating $50,000 in annual dividends can help you live comfortably.
And while that is not a small amount of dividend income, generating that much in the future may not be as daunting of a challenge as it appears to be. Here's a look at how investing $50 per week can help fund your retirement years.
Investing in growth is the best option to build up your portfolio
Dividend stocks can be safe options for investors on a fixed income who need stability. But if you're looking at an investing period the spans decades, then growth stocks can be a much better option for you. That's because while there might be volatility and bad years along the way, that should balance out over the long term.
A great example is the performance of the Invesco QQQ Trust (QQQ 0.95%), which gives investors exposure to the top 100 nonfinancial stocks on the Nasdaq Stock Market. The tech-heavy fund includes big names such as Apple, Microsoft, and Amazon. Over the past 10 years, its total returns (including dividends) have totaled 407%. That averages out to a compounded annual growth rate of 17.6% -- well above the long-run average of the S&P 500, which is close to 10%.
The fund is a good place to invest, especially if you're unsure of which stock(s) to put your money into. It can simplify your investing strategy, making it easier to set aside money every week into the fund.
Getting your portfolio to $1 million is the key
Before you can rely on dividend income, you first need a fairly large portfolio balance. And you can build it up over the years by investing just $50 per week (assuming minimal or no commission costs).
This chart shows you how, over a period of 30 years, investing $50 every week could grow your portfolio to more than $1 million.
Chart by author.
Assuming a 15% annual growth rate (on average), a $50 per-week investment could grow to a value of more than $1.5 million after 30 years. And it would take a little more than 27 years for it to hit the $1 million mark.
Averaging such a high growth rate may be challenging, but even if it's not quite that high, you could still end up close to or over $1 million. And with a growth-focused fund such as the Invesco QQQ Trust, you can maximize your odds of achieving those kinds of returns without having to take on much risk in the process.
The next step is to invest in dividend stocks
If you get your portfolio to $1 million or more, you've accomplished the hard part. Once you've got a balance that high, you can put it to work by investing it into high-yielding dividend stocks. During your retirement years, you'll likely want to move away from growth stocks anyway, and into less volatile investments. And the higher that balance gets, the less of a dividend yield you'll need to generate some significant income.
If, for example, your portfolio gets to a value of $1.5 million, you could invest in a fund or multiple investments that yield an average of 3.3%. At that rate, you could generate $50,000 in annual dividends. With a lower portfolio balance of $1 million, you would need to target an average yield of 5%.
Invest early and often for the best results
Amid inflation and rising interest rates, it's not an easy time to find money to invest in stocks. But if you can find a way to cut $50 per week out of your budget to invest into a diversified fund such as the Invesco QQQ Trust, it can pay off in droves for you later in life.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Microsoft. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
