Here's why investing in stocks can set you up for a comfortable retirement

When people choose to ignore the stockmarket, they risk losing more than just their money.

a woman

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If you dream about your retirement, what would it be like?

Would you dream of a fancy car, big house, long boat or maybe spending time with the love of your life? Nobody can guarantee how it'll eventuate but one thing is for sure. We've all got an ideal way to spend our most relaxed years.

For example, the dream of one day sailing on a yacht through the Whitsundays, with the sun falling on your back, is what many of us long for. There would be no concerns over money because you've worked hard your whole life. And you deserve to spoil yourself.

The bad news… We also have nightmares

Unfortunately many of us cannot afford to live-out our dreams. We won't be able afford the lifestyle we'd like when we hit retirement.

Late last year, banking and insurance giant Suncorp Group Ltd (ASX: SUN) surveyed 2,000 Australians and found, "an alarming disconnect between what Australians want in their retirement and what they are actually working towards." If you're about 10 to 15 years from finishing work and kicking up your feet for the final time, your dreams could appear a long way off.

According to the report, one in every three baby-boomers (those born between 1946 and 1964) have less than $100,000 in their nest egg. That's 33% of all Australians approaching retirement! As a consequence, 25% of them expect to work into their 80s!

Heed the warning

When I was younger, I was told repeatedly to respect my elders and work hard to succeed. Two values I've not taken for granted. Both of which have served me well. However, as time has gone by, I realised it's important to work smart, not hard.

Albert Einstein, perhaps the world's most renowned physicist, compared the idea of making money work for us, to the greatest achievements of man. He said: "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't… pays it."

For example the difference between $10,000 invested at only 5.5% and 8% for one year is $250. Over 10 years its $4,500. However after 30 years, $10,000 at 8% p.a. turns into $100,600 versus 5.5% p.a. returning just $49,800.

Despite a GFC, dotcom bubble, rising property prices, North Korea's recent demonstrations, Cyprus, and Channel 10's premier of The Shire, the Australian sharemarket has turned a $10,000 investment into $270,000 in just the past 30 years. I bet the 33% of baby boomers would be kicking themselves today!

"but it's too hard"

$270,000 for just putting your money in an index fund seems like easy work. It is. Smart, easy and extremely rewarding. Still…. it's too hard to invest. Isn't it?

Too many Australians do not understand the stockmarket or investing in general. They're missing out on truly fantastic gains because of the 'great Australian dream'. The idea that owning your own home is the be-all and end-all. Remember what Albert Einstein said earlier… "He who doesn't [understand compound interest] … pays it."

Buying a home with your own money is a fantastic achievement and it gives you a great sense of accomplishment. But is the idea of taking out an 80% loan from the likes of Westpac Banking Corporation (ASX: WBC) or National Australia Bank Ltd (ASX: NAB), for an average 5% p.a. in interest over 30 years really a great achievement? I'm sticking to what Einstein said.

Foolish takeaway

At the end of the day, if you're saving money it's a good thing. But the great thing is to use it appropriately. Invest it. Make it work for itself and if you don't know how to. Learn. Do a course, read a book, whatever you need to do. The learning curve might seem steep but you're here-and-now sacrifice will reap rewards which last a lifetime. Do you want your dreams to come true?

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the companies mentioned here, but prefers to make interest work for him. 

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