If there's one thing we can all agree on, it is that retiring with financial security would be a very good thing. And while building a substantial nest egg for retirement may seem like a tough task, it needn't be.
With the power of compounding on your side, delivering on this goal becomes very achievable. This is because by investing in ASX shares over the long term, you can use compounding to grow your portfolio and pave the way for a comfortable retirement.
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The power of compounding
Compounding is, in many respects, a financial superpower. It allows your investments to generate returns on both the principal amount and future returns.
It is like a snowball rolling down a hill, gaining momentum and size as it goes. By reinvesting the returns generated by your ASX shares, your portfolio can experience exponential growth over time.
To demonstrate this, let's take a look at what would have happened if you had invested $10,000 into the share market each year for the last 30 years.
During this time, according to Fidelity, the Australian share market has delivered a 9.55% per annum return for investors.
If you had matched this return with your investments, your $10,000 per year investments would now be worth approximately $1.65 million.
And just to show you how compounding works its magic the longer you leave it, let's see what a further 5 years would do to your portfolio value.
After 35 years of investing $10,000 into ASX shares and earning an average 9.55% per annum return, your portfolio would have added another million to its balance and be worth approximately $2.65 million.
It took 30 years to get to $1.65 million but just 5 more years to add another million, that's compounding for you!
How to retire rich with ASX shares
It is worth noting that there's no guarantee that the share market will produce returns of this level over the next 30 to 35 years. However, these returns are in line with historical averages, so it isn't unreasonable to believe that it would be possible.
With that in mind, investors just need to put a plan into action. This requires a long-term mindset. It's about investing in quality companies with sustainable business models and patiently allowing compounding to work its magic. The key is to resist the temptation of short-term market fluctuations and focus on the long-term. Which is easier said than done.
