If someone had $0 in savings and wanted to retire comfortably, I’d say that it’s definitely possible through using ASX shares.
It’s a difficult time to start trying to save. Energy, rent, and food prices have gone up considerably. Interest rates have also increased significantly, hurting borrowers.
However, hopefully each household can identify a way to find $500 a month in savings. Each household’s income potential and expenses are different, so it’s hard to say where to find that $500 each month. But there are plenty of budgeting and other personal finance tips out there that can help.
Aim to retire in comfort
I imagine most people would like to live out their golden years in relative comfort. But how much do we need to be comfortable in retirement?
For starters, I’d suggest it’s having enough so that people don’t need to work. The pension isn’t a massive amount of money and I wouldn’t want to rely on that in the future to live, in case it’s less generous in future decades.
As covered by the Motley Fool’s retirement guide, the Association of Superannuation Funds of Australia’s Retirement Standard suggests that to have a ‘comfortable’ retirement, a couple who own their own home will need an income of about $67,000. A single person will need an annual income of more than $47,000. These numbers are likely to increase in the future.
While that may sound like a lot, time and compounding can help grow relatively small amounts of money into a large nest egg.
How investing $500 a month into ASX shares can grow
If we think about putting $500 a month into the ASX share market, then this translates into $6,000 per year. That’s $60,000 per decade if the monthly amount never changes. Obviously, the more we invest, the quicker we can build wealth to retire.
However, the great thing about investing in ASX shares is that compounding can do a lot of wealth-building for us.
The ASX share market and global share market have both delivered an average return per annum of approximately 10% over the ultra-long term. Of course, past performance is not a reliable indicator of future performance, but I’ll use that as an example of how much money can grow.
Investing $500 a month, growing at an average of 10% per annum for 30 years, can grow into a total of $987,000. Almost $1 million. In this example, we would have invested $180,000 of our own money, while $807,000 of that would have come from investment gains.
Doing that for 40 years would see the nest egg turn into $2.65 million. With just $500 a month. That’s the power of compounding.
Which ASX shares to buy?
The easy option would be to choose exchange-traded funds (ETFs) that invest in a whole range of businesses.
While a lot of Aussies go for the Vanguard Australian Shares Index ETF (ASX: VAS), it’s not my favourite ETF, as good as it is. It owns all of the ASX blue chips. But, Australia is only a small part of the global share market, the ASX is weighted to ASX mining shares and ASX bank shares, and a large amount of returns come as dividends. I love dividends, but receiving dividends usually means paying tax in that financial year, whereas capital growth isn’t taxed until the asset is sold.
So, if I were going to name ETFs, I would want to choose investments that offer global share market diversification and are allocated to a group of businesses that could achieve stronger capital growth than the ASX. A few examples I like include VanEck Morningstar Wide Moat ETF (ASX: MOAT), VanEck MSCI International Quality ETF (ASX: QUAL) and Vanguard Msci Index International Shares ETF (ASX: VGS).
