Nobody wants to get to retirement age only to realise they don't have enough funds to live as comfortably as they had dreamed.
The good news is that this living nightmare doesn't have to happen to you. By planning ahead and investing wisely in ASX shares, you could put yourself in a position to have a rich retirement.
Let's take a look at three steps you could take to try and make this dream a reality.
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Step one: Start as early as you can
Time is an investor's best friend. The longer you have to allow compounding to do its thing, the less capital you need to deploy into ASX shares.
For example, if you have an investment time horizon of 30 years, then by investing $500 a month, you would grow your investment portfolio to a sizeable $1 million if you can generate an average total return of 10% per annum.
And while future returns are not guaranteed, this return is in line with historical averages. As a result, I feel it is reasonable to aim for this in the future.
Now imagine you only have 10 years to invest until retirement. Instead of making $500 monthly investments into ASX shares, you would need to put in $5,000 a month to get to $1 million if you achieve an average 10% per annum return.
Step two: Buy quality ASX shares for your retirement portfolio
If you're wanting a rich retirement, then you ought to consider buying only the highest quality ASX shares for a balanced portfolio.
Traits to look for are strong business models, experienced and talented management teams, sustainable competitive advantage, and positive long-term growth outlooks.
These are the qualities that Warren Buffett looks for when he makes his investments. And given that he has doubled the market return since the 1960s, it's fair to say that his investment strategy is tried and tested.
Companies like CSL Ltd (ASX: CSL) and Goodman Group (ASX: GMG) could tick these boxes and be worth further investigation.
Step three: Reinvest dividends
While getting a pay check every six months from your ASX shares is undoubtedly very nice, unless you absolutely need these dividends, you should consider reinvesting them into the market.
That's because if you take them out, you're stopping them from compounding each year along with the rest of your funds. This will slow down your wealth creation and could leave you with less in your retirement portfolio than you were hoping to have come retirement time.
Let's imagine that you have a 2% dividend yield across your investment portfolio. If you take those dividends out, your investment portfolio would only grow by 8% per annum (if you achieve a 10% total return).
Going back to our $500 a month investment example, this new growth rate would mean you end up with a portfolio valued at $710,000 after 30 years. That's almost $300,000 that you have sacrificed by pulling out the dividends.
Overall, by following these three steps, investors have a good chance of retiring rich.
